FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

For the quarterly period ended June 30, 2002

 

OR

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                      to                                .

 

Commission file number 1-13661

 

S. Y. BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky		61-1137529
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1040 East Main Street, Louisville, Kentucky, 40206
(Address of principal executive offices)
(Zip Code)
(502) 582-2571
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports 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 ý    No o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, no par value – 6,723,631

Shares issued and outstanding at August 13, 2002

 

 

PART I - FINANCIAL INFORMATION

 

 

Item 1.  Financial Statements

 

The following consolidated financial statements of S.Y. Bancorp, Inc. and subsidiaries, Stock Yards Bank & Trust Company and S.Y. Bancorp Capital Trust I, are submitted herewith:

 

 

1

 

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Balance Sheets

June 30, 2002 and December 31, 2001

(In thousands, except share data)

 

		June 30, 2002			December 31, 2001
Assets
Cash and due from banks		$	35,087		29,803
Federal funds sold		6,121			218
Mortgage loans held for sale		5,219			13,963
Securities available for sale (amortized cost $88,341 in 2002 and $75,563 in 2001)		91,051			76,884
Securities held to maturity (approximate fair value $11,458 in 2002 and $14,174 in 2001)		11,024			13,878
Loans		800,396			777,441
Less allowance for loan losses		11,565			10,965
Net loans		788,831			766,476
Premises and equipment		20,649			19,421
Accrued interest receivable and other assets		16,857			16,650
Total assets		$	974,839		937,293
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing		$	122,514		118,165
Interest bearing		691,678			635,386
Total deposits		814,192			753,551
Securities sold under agreements to repurchase and federal funds purchased		46,018			79,031
Other short-term borrowings		3,979			1,880
Accrued interest payable and other liabilities		11,023			10,877
Long-term debt		240			270
Long-term debt - trust preferred securities		20,000			20,000
Total liabilities		895,452			865,609
Stockholders’ equity:
Common stock, no par value; 10,000,000 shares authorized; 6,721,791 and 6,672,294 shares issued and outstanding in 2002 and 2001, respectively		5,876			5,711
Surplus		15,336			14,404
Retained earnings		56,613			50,924
Accumulated other comprehensive income		1,562			645
Total stockholders’ equity		79,387			71,684
Total liabilities and stockholders’ equity		$	974,839		937,293

 

See accompanying notes to unaudited consolidated financial statements.

 

2

 

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income

For the three months ended June 30, 2002 and 2001

(In thousands, except share and per share data)

 

		2002			2001
Interest income:
Loans		$	14,350		15,010
Federal funds sold		111			275
Mortgage loans held for sale		72			115
U.S. Treasury and Federal agencies		957			900
Obligations of states and political subdivisions		294			303
Total interest income		15,784			16,603
Interest expense:
Deposits		5,141			7,411
Securities sold under agreements to repurchase and federal funds purchased		204			413
Other short-term borrowings		4			18
Long-term debt		2			107
Long-term debt - trust preferred securities		450			150
Total interest expense		5,801			8,099
Net interest income		9,983			8,504
Provision for loan losses		1,100			1,075
Net interest income after provision for loan losses		8,883			7,429
Non-interest income:
Investment management and trust services		2,021			1,890
Service charges on deposit accounts		1,861			1,802
Gains on sales of mortgage loans held for sale		472			477
Other		789			682
Total non-interest income		5,143			4,851
Non-interest expenses:
Salaries and employee benefits		4,881			4,301
Net occupancy expense		516			446
Furniture and equipment expense		797			581
Other		2,365			2,039
Total non-interest expenses		8,559			7,367
Income before income taxes		5,467			4,913
Income tax expense		1,803			1,561
Net income		$	3,664		3,352
Net income per share:
Basic		$	0.55		0.50
Diluted		$	0.52		0.49
Average common shares:
Basic		6,712,352			6,656,341
Diluted		6,987,378			6,909,938

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Income

For the six months ended June 30, 2002 and 2001

(In thousands, except share and per share data)

 

		2002			2001
Interest income:
Loans		$	28,510		29,956
Federal funds sold		177			531
Mortgage loans held for sale		157			170
U.S. Treasury and Federal agencies		1,802			1,817
Obligations of states and political subdivisions		592			597
Total interest income		31,238			33,071
Interest expense:
Deposits		10,146			15,096
Securities sold under agreements to repurchase and federal funds purchased		482			992
Other short-term borrowings		13			34
Long-term debt		5			147
Long-term debt - trust preferred securities		900			150
Total interest expense		11,546			16,419
Net interest income		19,692			16,652
Provision for loan losses		2,000			1,875
Net interest income after provision for loan losses		17,692			14,777
Non-interest income:
Investment management and trust services		4,063			3,580
Service charges on deposit accounts		3,531			3,383
Gains on sales of mortgage loans held for sale		853			844
Other		1,669			1,414
Total non-interest income		10,116			9,221
Non-interest expenses:
Salaries and employee benefits		9,712			8,661
Net occupancy expense		994			920
Furniture and equipment expense		1,521			1,184
Other		4,589			3,842
Total non-interest expenses		16,816			14,607
Income before income taxes		10,992			9,391
Income tax expense		3,625			3,000
Net income		$	7,367		6,391
Net income per share:
Basic		$	1.10		0.96
Diluted		$	1.06		0.93
Average common shares:
Basic		6,701,305			6,650,736
Diluted		6,965,754			6,874,830

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Cash Flows

For the six months ended June 30, 2002 and 2001

(In thousands)

 

		2002			2001
Operating activities:
Net income		$	7,367		6,391
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses		2,000			1,875
Depreciation, amortization and accretion, net		1,015			899
Gains on sales of mortgage loans held for sale		(853		)	(844	)
Origination of mortgage loans held for sale		(49,924		)	(48,912	)
Proceeds from sale of mortgage loans held for sale		59,521			46,478
Loss on the sale of premises and equipment		16			—
Gain on the sale of other real estate		(4		)	—
Income tax benefit of stock options exercised		283			30
Increase in accrued interest receivable and other assets		(1,389		)	(61	)
Increase (decrease) in accrued interest payable and other liabilities		73			(553	)
Net cash provided by operating activities		18,105			5,303
Investing activities:
Net (increase) decrease in federal funds sold		(5,903		)	15,520
Purchases of securities available for sale		(19,976		)	(18,906	)
Proceeds from maturities of securities available for sale		7,131			14,205
Proceeds from maturities of securities held to maturity		2,903			1,812
Net increase in loans		(23,988		)	(54,698	)
Purchases of premises and equipment		(2,241		)	(1,939	)
Proceeds from sales of other real estate		347			—
Net cash used by investing activities		(41,727		)	(44,006	)
Financing activities:
Net increase in deposits		60,641			17,348
Net decrease in securities sold under agreements to repurchase and federal funds purchased		(33,013		)	(8,699	)
Net increase in other short-term borrowings		2,099			1,917
Repayments of long-term debt		(30		)	(1,800	)
Net proceeds from long-term debt - trust preferred securities		—			20,000
Issuance of common stock for options and dividend reinvestment plan		814			323
Common stock repurchases		—			(220	)
Cash dividends paid		(1,605		)	(1,396	)
Net cash provided by financing activities		28,906			27,473
Net increase (decrease) in cash and cash equivalents		5,284			(11,230	)
Cash and cash equivalents at beginning of period		29,803			44,597
Cash and cash equivalents at end of period		$	35,087		33,367
Supplemental cash flow information:
Income tax payments		$	3,800		3,700
Cash paid for interest		$	11,605		16,278

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For the six months ended June 30, 2002

(In thousands, except share and per share data)

 

		Common Stock					Surplus			Retained Earnings			Accumulated Other Comprehensive Income			Total
		Number of Shares		Amount
Balance December 31, 2001		6,672,294		$	5,711		$	14,404		$	50,924		$	645		$	71,684
Net income		—		—			—			7,367			—			7,367
Change in other comprehensive income, net of tax		—		—			—			—			917			917
Shares issued for stock options exercised and employee benefit plans		49,497		165			932			—			—			1,097
Cash dividends, $0.25 per share		—		—			—			(1,678		)	—			(1,678		)
Balance June 30, 2002		6,721,791		$	5,876		$	15,336		$	56,613		$	1,562		$	79,387

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

S.Y.BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Comprehensive Income

For the three months ended June 30, 2002 and 2001

(In thousands)

 

		2002			2001
Net income		$	3,664		3,352
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities available for sale arising during the period		1,224			(27	)
Other comprehensive income (loss)		1,224			(27	)
Comprehensive income		$	4,888		3,325

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

S.Y. BANCORP, INC. AND SUBSIDIARIES

Unaudited Consolidated Statements of Comprehensive Income

For the six months ended June 30, 2002 and 2001

(In thousands)

 

		2002			2001
Net income		$	7,367		6,391
Other comprehensive income, net of tax:
Unrealized holding gains on securities available for sale arising during the period		917			567
Other comprehensive income		917			567
Comprehensive income		$	8,284		6,958

 

See accompanying notes to unaudited consolidated financial statements.

 

8

 

S.Y. BANCORP, INC. AND SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

(1)                                 Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  The consolidated financial statements of S.Y. Bancorp, Inc. (Bancorp) and its subsidiaries reflect all adjustments (consisting only of adjustments of a normal recurring nature) that are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods.

 

The unaudited consolidated financial statements include the accounts of S.Y. Bancorp, Inc. and its wholly owned subsidiaries, Stock Yards Bank & Trust Company and S.Y. Bancorp Capital Trust I.  All significant intercompany transactions have been eliminated in consolidation.

 

A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2001 included in S.Y. Bancorp, Inc.’s Annual Report on Form 10-K for the year then ended.

 

Interim results for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results for the entire year.

 

(2)                                 Allowance for Loan Losses

 

An analysis of the changes in the allowance for loan losses for the six months ended June 30 follows:

 

 

(3)                                 Long-term Debt – Trust Preferred Securities

 

On June 1, 2001, S.Y. Bancorp Capital Trust I (Trust), a Delaware statutory business trust and 100%-owned finance subsidiary of Bancorp, issued $20.0 million of 9.00% Cumulative Trust Preferred Securities (Securities) which will mature on June 30, 2031, but prior redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules.  The principal asset of the Trust is a $20.0 million subordinated debenture of Bancorp.  The subordinated debenture bears interest at the rate of 9.00% and matures June 30, 2031, subject to prior redemption under certain circumstances.  Bancorp owns all of the common securities of the Trust.

 

The Securities, the assets of the Trust, and the common securities issued by the Trust are redeemable in whole or in part on or after June 30, 2006, or at any time in whole, but not in part, from the date of issuance upon the occurrence of certain events.  The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations.

 

9

 

The obligations of Bancorp with respect to the issuance of the Securities constitute a full and unconditional guarantee by Bancorp of the Trust’s obligation with respect to the Securities.

 

Subject to certain exceptions and limitations, Bancorp may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the related Securities and, with certain exceptions, prevent Bancorp from declaring or paying cash distributions on Bancorp’s common stock or debt securities that rank pari passu or junior to the subordinated debenture.

 

(4)                                 Intangible Assets

 

Bancorp adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”), effective January 1, 2002.  This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually.  Bancorp currently has unamortized goodwill remaining from the acquisition of a bank in southern Indiana in the amount of $682,000.  This goodwill is assigned to the commercial and retail banking segment of Bancorp.  As prohibited by SFAS No. 142, the results for the three and six month periods ended June 30, 2001, have not been restated.  The amount of goodwill amortization included in net income for the three and six month periods ended June 30, 2001 was $17,000 and $34,000, respectively.

 

(5)                                 Net Income Per Share

 

The following table reflects, for the three and six months periods ended June 30, net income (the numerator) and average shares outstanding (the denominator) for the basic and diluted net income per share computations (in thousands except per share data):

 

		Three Months Ended June 30					Six Months Ended June 30
		2002			2001		2002		2001
Net income, basic and diluted		$	3,664		3,352		7,367		6,391
Average shares outstanding		6,712			6,656		6,701		6,651
Effect of dilutive securities		275			254		265		224
Average shares outstanding including dilutive securities		6,987			6,910		6,966		6,875
Net income per share, basic		$	0.55		0.50		1.10		0.96
Net income per share, diluted		$	0.52		0.49		1.06		0.93

 

(6)                                 Segments

 

The Bank’s, and thus Bancorp’s, principal activities include commercial and retail banking, investment management and trust, and mortgage banking.  Commercial and retail banking provides a full range of loans and deposit products to individual consumers and businesses.  Investment management and trust provides wealth management services including brokerage, estate planning and administration, retirement plan management, and custodian or trustee services. Mortgage banking originates residential loans and sells them, servicing released, in the secondary market.

 

10

 

The financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method.  The measurement of the performance of the business segments is based on the management structure of the Bank and is not necessarily comparable with similar information for any other financial institution.  The information presented is also not necessarily indicative of the segments’ operations, if they were independent entities.

 

Selected financial information by business segment for the three and six months ended June 30 follows:

 

		Three Months Ended June 30					Six Months Ended June 30
(In thousands)		2002			2001		2002		2001
Net interest income:
Commercial and retail banking		$	9,846		8,409		19,440		16,434
Investment management and trust		15			(10	)	25		4
Mortgage banking		122			105		227		214
Total		$	9,983		8,504		19,692		16,652
Non-interest income:
Commercial and retail banking		$	2,363		2,270		4,554		4,334
Investment management and trust		2,196			1,934		4,486		3,752
Mortgage banking		584			647		1,076		1,135
Total		$	5,143		4,851		10,116		9,221
Net income:
Commercial and retail banking		$	2,966		2,668		6,053		5,103
Investment management and trust		543			546		1,115		1,016
Mortgage banking		155			138		199		272
Total		$	3,664		3,352		7,367		6,391

 

Principally, all of the net assets of Bancorp are involved in the commercial and retail banking segment.

 

11

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This item discusses the results of operations for S.Y. Bancorp, Inc. (Bancorp), and its subsidiaries, Stock Yards Bank & Trust Company and S.Y. Bancorp Capital Trust I for the three and six months ended June 30, 2002 and compares that period with the same period of the previous year.  Unless otherwise indicated, all references in this discussion to the “Bank” include Bancorp.  In addition, the discussion describes the significant changes in the financial condition of Bancorp and the Bank that have occurred during the first six months of 2002 compared to December 31, 2001.  This discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

 

In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, Bancorp makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  There can be no assurances that actual results will not differ from those estimates.

 

We have identified the accounting policy related to the allowance for loan losses and the related provision for loan losses as critical to the understanding of Bancorp’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.  The impact and any associated risks related to these policies on our business operations are discussed in the “Provision for Loan Losses” section below.

 

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 subsidiaries 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.

 

(a)               Results Of Operations

 

Net income of $3,664,000 for the three months ended June 30, 2002 increased $312,000 or 9.3% from $3,352,000 for the comparable 2001 period.  Basic net income per share was $0.55 for the second quarter of 2002, an increase of 10.0% from the $0.50 for the same period in 2001.  Net income on a diluted basis was $0.52 for the second quarter of 2002 compared to $0.49 for the second quarter of 2001.  This represents a 6.1% increase.  Return on average assets and return on average stockholders’ equity were 1.50% and 19.05%, respectively, for the second quarter of 2002, compared to 1.55% and 21.06%, respectively, for the same period in 2001.

 

12

 

Net income of $7,367,000 for the six months ended June 30, 2002 increased $976,000 or 15.3% from $6,391,000 in the comparable 2001 period.  Basic net income per share was $1.10 for the first six months of 2002, compared to $0.96, representing an increase of 14.6% from the same period in 2001.  Net income on a diluted basis was $1.06 for the first six months of 2002 compared to $0.93 for the first six months of 2001. This represents a 14.0% increase.  Return on average assets and return on average stockholders’ equity were 1.54% and 19.68%, respectively, for the first six months of 2002, compared to 1.50% and 20.35%, respectively, for the same period in 2001.

 

The following paragraphs provide a more detailed analysis of the significant factors affecting operating results and financial condition.

 

Net Interest Income

 

		Three Months Ended June 30					Six Months Ended June 30
(Dollars in thousands)		2002			2001		2002		2001
Interest income		$	15,784		16,603		31,238		33,071
Tax equivalent		162			147		321		276
Interest income, tax equivalent basis		15,946			16,750		31,559		33,347
Total interest expense		5,801			8,099		11,546		16,419
Net interest income, tax equivalent basis (1)		$	10,145		8,651		20,013		16,928
Net interest spread (2), annualized		3.92		%	3.54	%	3.96	%	3.51	%
Net interest margin (3), annualized		4.41		%	4.24	%	4.45	%	4.23	%

 

Notes:

 

(1)          Net interest income, the most significant component of the Bank’s earnings, is total interest income less total interest expense.  The level of net interest income is determined by the mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and by changes in interest rates.

 

(2)          Net interest spread is the difference between the taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.

 

(3)          Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets.  Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity.

 

Fully taxable equivalent net interest income of $10,145,000 for the three months ended June 30, 2002 increased $1,494,000 or 17.3% from $8,651,000 when compared to the same period last year.  Net interest spread and net interest margin were 3.92% and 4.41%, respectively, for the second quarter of 2002 and 3.54% and 4.24%, respectively, for the second quarter of 2001.

 

Fully taxable equivalent net interest income of $20,013,000 for the six months ended June 30, 2002 increased $3,085,000 or 18.2% from the same period last year.  Net interest spread and net interest margin were 3.96% and 4.45%, respectively, for the first six months of 2002 and 3.51% and 4.23%,

 

13

 

respectively, for the first six months of 2001.  For the year to date period, the increase in net interest margin was primarily a result of the rate decline in interest bearing liabilities exceeding the rate decline in interest earning assets.

 

Looking forward, management expects net interest margin to be lower by 10 to 15 basis points by the end of the year.  The margin peaked in the first quarter of 2002 as higher rate certificates of deposit matured and renewals were at significantly lower rates.  Additionally, average rates on loan balances have declined as higher rate loans mature.  Management is contemplating a transaction in the second half of 2002 that would have a positive impact on net income, but could lower net interest margin further.  This transaction involves transferring customer money market accounts related to trust accounts currently held at a third party institution into the Bank's money market product.  A 2002 change in Kentucky statutes allows trust deposits to be held at the Bank in interest bearing accounts as long as certain conditions are met.  This transaction could add approximately $55 million in interest bearing deposits.

 

Average earning assets increased $99,866,000, or 12.4% to $907,512,000 for the first six months of 2002 compared to the first six months of 2001, reflecting continued growth in the loan portfolio.  Average interest bearing liabilities increased $74,390,000 or 10.8% to $761,619,000 for the first six months of 2002 compared to 2001 primarily due to increases in interest bearing deposits.

 

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 June 30, 2002 simulation analysis indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in interest rates would have a negative effect on net interest income.

 

Interest Rate Simulation Sensitivity Analysis

 

		Net Interest Income Change		Net Income Change
Increase 200bp		7.79	%	13.68	%
Increase 100bp		3.90		6.85
Decrease 100bp		(3.87	)	(6.80	)
Decrease 200bp		(5.76	)	(10.12	)

 

14

 

Provision for Loan Losses

 

The allowance for loan losses is based on management’s continuing review of individual credits, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans, and such other factors that, in management’s judgment, deserve current recognition in estimating loan losses.

 

An analysis of the changes in the allowance for loan losses and selected ratios follow:

 

		Six Months Ended June 30
(Dollars in thousands)		2002			2001
Balance at the beginning of the period		$	10,965		9,331
Provision for loan losses		2,000			1,875
Loan charge-offs, net of recoveries		(1,400		)	(986	)
Balance at the end of the period		$	11,565		10,220
Average loans, net of unearned income		$	783,967		692,879
Provision for loan losses to average loans (1)		0.51		%	0.55	%
Net loan charge-offs to average loans (1)		0.36		%	0.29	%
Allowance for loan losses to average loans		1.48		%	1.48	%
Allowance for loan losses to period-end loans		1.44		%	1.42	%

 

(1) Amounts annualized

 

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Non-interest Income and Expenses

 

The following table sets forth the major components of non-interest income and expenses for the three and six month periods ended June 30, 2002 and 2001.

 

(In thousands)		Three Months Ended June 30					Six Months Ended June 30
		2002			2001		2002		2001
Non-interest income:
Investment management and trust services		$	2,021		1,890		4,063		3,580
Service charges on deposit accounts		1,861			1,802		3,531		3,383
Gains on sales of mortgage loans held for sale		472			477		853		844
Other		789			682		1,669		1,414
Total non-interest income		$	5,143		4,851		10,116		9,221
Non-interest expenses:
Salaries and employee benefits		4,881			4,301		9,712		8,661
Net occupancy expense		516			446		994		920
Furniture and equipment expense		797			581		1,521		1,184
Other		2,365			2,039		4,589		3,842
Total non-interest expenses		$	8,559		7,367		16,816		14,607

 

Non-interest income increased $292,000, or 6.0%, for the second quarter of 2002, compared to the same period in 2001.  Non-interest income increased $895,000 or 9.7% for the first six months of 2002 compared to the same period of 2001.

 

Investment management and trust services income increased $131,000 or 6.9% in the second quarter of 2002, as compared to the same period in 2001.  Investment management and trust services income increased $483,000 or 13.5% in the first six months of 2002 as compared to the same period in 2001. Trust assets under management at June 30, 2002 were $1.17 billion, down 0.9% from $1.18 billion at December 31, 2001 and up 5.5% from $1.11 billion at June 30, 2001.  Trust assets are expressed in terms of market value.  While total trust assets have been affected by negative equity markets, these decreases have been mitigated by the addition of new accounts.

 

Service charges on deposit accounts increased $59,000 or 3.3% in the second quarter of 2002 and $148,000 or 4.4% in the first six months of 2002 as compared to the same periods in 2001.  Growth in service charges on deposits has slowed compared to prior periods.  An overdraft service was added in 2000 that initially added significantly to overall fees.  The majority of the Bank’s retail checking customers now have been offered this service and growth going forward will be more moderate.

 

Gains on sales of mortgage loans were $472,000 in the second quarter of 2002 and $853,000 in the first six months of 2002 compared to $477,000 and $844,000, respectively, in 2001.  The Bank operates a mortgage banking company that originates residential mortgage loans and sells the loans, servicing released, in the secondary market.

 

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Other non-interest income increased $107,000 or 15.7% in the second quarter of 2002 and $255,000 or 18.0% in the first six months of 2002 compared to 2001.  Numerous factors contributed to this increase, including (year to date) approximately $78,000 from check card income and approximately $250,000 related to brokerage income.  A new group of brokers joined the Bank in mid-2001 and as a result, activity levels have improved.  These increases in non-interest income were offset somewhat by decreases in a variety of accounts, none of which was individually material.

 

Non-interest expenses increased $1,192,000 or 16.2% for the second quarter of 2002 and $2,209,000 or 15.1% year to date 2002 as compared to the same periods in 2001.  Salaries and employee benefits increased $580,000, or 13.5%, for the second quarter of 2002 and $1,051,000 or 12.1% year to date compared to the same periods in 2001.  These increases arose in part from regular salary increases and in part from the continued addition of new personnel to support the Bank’s growth.  The Bank had 353 full time equivalent employees as of June 30, 2002 and 329 full time equivalents as of June 30, 2001.  Net occupancy expense increased $70,000 or 15.7% in the second quarter of 2002 as compared to 2001, while it increased $74,000 or 8.0% on a year to date basis.  Most of the increase in the second quarter of 2002 can be attributed to maintenance work related to the branch network.  Furniture and equipment expense increased $216,000 for the second quarter of 2002 and $337,000 for the year to date period 2002 compared to 2001.  This increase was primarily due to costs related to the installation of a new phone system and computer upgrades including the purchase of a new mainframe computer.  This new equipment represents a significant investment in the future growth of the Bank.  Other non-interest expenses increased $326,000 or 16.0% in the second quarter of 2002 and $747,000 or 19.4% year to date 2002 as compared to 2001.  These increases can be attributed to several factors.  The biggest contributors (year to date) include an approximate $225,000 increase in the marketing and advertising expenses primarily related to a new personal checking product introduced in 2001 and an approximate $181,000 increase to the Bank’s state franchise tax that is primarily based on regulatory capital levels.  There was also an approximate $64,000 increase in expenses related to the Bank’s automated teller machine  (ATM) network.  The remaining increase occurred in a variety of accounts, none of which was individually material.

 

Income Taxes

 

Bancorp had income tax expense of $3,625,000 for the first six months of 2002, compared to $3,000,000 for the same period in 2001.  The effective rate for each six month period was 33.0% in 2002 and 31.9% in 2001.  Income tax expense for the second quarter of 2002 was $1,803,000 versus $1,561,000 in 2001.  The respective effective tax rates were 33.0% for the second quarter of 2002 and 31.8% for the second quarter of 2001.

 

(b)     Financial Condition

 

Balance Sheet

 

Total assets increased $37,546,000 from $937,293,000 on December 31, 2001 to $974,839,000 on June 30, 2002. Average assets for the first six months of 2002 were $963,563,000.  Total assets at June 30, 2002 increased $88,671,000 from June 30, 2001, representing a 10.0% increase.  Total liabilities increased $29,843,000 from $865,609,000 on December 31, 2001 to $895,452,000 on June 30, 2002.  Average liabilities for the first six months of 2002 were $888,083,000.  Total liabilities at June 30, 2002 increased $75,198,000 from June 30, 2001, representing a 9.2% increase.

 

Since year end, loans have increased approximately $22,955,000 and securities have increased $11,313,000.  This growth has been funded primarily through the $60,641,000 increase in deposits and offset somewhat by the $33,013,000 decrease in securities sold under agreements to repurchase and federal funds purchased. 

 

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Non-performing Loans and Assets

 

Non-performing loans, which included non-accrual loans of $4,533,000 and loans past due over 90 days of $1,325,000, totaled $5,858,000 at June 30, 2002.  Non-performing loans were $5,121,000 at December 31, 2001. This represents 0.73% of total loans at June 30, 2002 compared to 0.66% at December 31, 2001.  The increase in non-performing loans was primarily due to one commercial credit.  The Bank has fully reserved any anticipated loss exposure related to this relationship.

 

Non-performing assets, which include non-performing loans, other real estate and repossessed assets, if any, totaled $5,995,000 at June 30, 2002 and $5,184,000 at December 31, 2001.  This represents 0.61% of total assets at June 30, 2002 compared to 0.55% at December 31, 2001.

 

(c)                Liquidity

 

The role of liquidity is to ensure that funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability.  This is accomplished by balancing changes in demand for funds with changes in the supply of those funds.  Liquidity to meet demand is provided by maturing assets, short-term liquid assets that can be converted to cash, and the ability to attract funds from external sources, principally deposits.  Management believes it has the ability to increase deposits at any time by offering rates slightly higher than the market rate.

 

The Bank has a number of sources of funds to meet its liquidity needs on a daily basis.  The deposit base, consisting of relatively stable consumer and commercial deposits, and large denomination ($100,000 and over) certificates of deposit, is a source of funds.  The majority of these deposits are from long-term customers and are a stable source of funds.  The Bank has no brokered deposits.

 

Other sources of funds available to meet daily needs include the sale of securities under agreements to repurchase and funds made available under a treasury tax and loan note agreement with the federal government.  Also, the Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB).  As a member of the FHLB, the Bank has access to credit products of the FHLB.  To date, the Bank has not needed to access this source of funds.  Additionally, the Bank has an available line of credit and federal funds purchased lines with correspondent banks totaling $56 million.

 

Bancorp’s liquidity depends primarily on the dividends paid to it as the sole shareholder of the Bank.  At June 30, 2002, the Bank may pay up to $29,220,000 in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.  During the year, the Bank paid no dividends to Bancorp.  Bancorp had sufficient cash balances to pay the quarterly dividend to shareholders without funding from the Bank.

 

(d)               Capital Resources

 

At June 30, 2002, stockholders’ equity totaled $79,387,000, an increase of $7,703,000 since December 31, 2001.  Accumulated other comprehensive income that for Bancorp consists of net unrealized gains on securities available for sale and a minimum pension liability adjustment, both of which are net of taxes, was $1,562,000 at June 30, 2002 and $645,000 at December 31, 2001.  The change since year end is a reflection of the effect of changing interest rates on the valuation of the Bank’s portfolio of securities available for sale.

 

Bancorp issued $20.0 million of 9.00% Cumulative Trust Preferred Securities in June 2001.  The issue was sold in a public offering.  Bancorp used approximately $13.3 million of the net proceeds from this

 

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offering to reduce indebtedness outstanding under a line of credit with an unaffiliated bank.  The remaining net proceeds will be used for making additional capital contributions to the Bank, for repurchases of common stock, and for general corporate purposes.  The trust preferred securities increased Bancorp’s regulatory capital and allow for the continued growth of its banking franchise.  The ability to treat these trust preferred securities as regulatory capital under Federal Reserve guidelines, coupled with the Federal income tax deductibility of the related expense, provides Bancorp with a cost-effective form of capital.

 

Bank holding companies and their subsidiary banks are required by regulators to meet risk based capital standards.  These standards, or ratios, measure the relationship of capital to a combination of balance sheet and off-balance sheet risks.  The values of both balance sheet and off-balance sheet items are adjusted to reflect credit risks.

 

At June 30, 2002, Bancorp’s tier 1, total risk based capital and leverage ratios were 12.59%, 13.88% and 9.90%, respectively, compared to 11.85%, 13.14%, and 9.69%, respectively, as of December 31, 2001.

 

(e)                Recently Issued Accounting Pronouncements

 

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” (SFAS 145), that updates, clarifies and simplifies existing accounting pronouncements.  SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from the Extinguishment of Debt.”  SFAS also amends SFAS No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for other certain lease modifications that have economic effects that are similar to sale-leaseback transactions.  The provisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years beginning and transactions occurring after May 15, 2002, respectively.  It is anticipated that the financial impact of SFAS 145 will not have a material effect on the results of Bancorp or its operations.

 

In July 2002, FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146), that requires recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.  SFAS 146 also establishes fair value as the objective for initial measurement of the liability.  The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002.  It is anticipated that the financial impact of SFAS 146 will not have a material effect on the results of Bancorp or its operations.

 

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Item 3.             Quantitative and Qualitative Disclosures about Market Risk

 

Information  required  by  this item  is  include in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Part II – Other Information

 

Item 4.             Submission of Matters to a Vote of Security Holders

 

None

 

Item 6.             Exhibits and Reports on Form 8-K

 

(a)          Reports on Form 8-K

 

No reports on Form 8-K were filed during the three months ended June 30, 2002.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		S.Y. BANCORP, INC.
Date:	August 13, 2002	By:	/s/ David H. Brooks
			David H. Brooks, Chairman
			and Chief Executive Officer
Date:	August 13, 2002	By:	/s/ David P. Heintzman
			David P. Heintzman, President
Date:	August 13, 2002	By:	/s/ Nancy B. Davis
			Nancy B. Davis, Executive
			Vice President, Treasurer and
			Chief Financial Officer

 

20

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with this Quarterly report of S.Y. Bancorp, Inc. on Form 10-Q for the period ending June 30, 2002 (the “Report”), we, the undersigned, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge and belief:  (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of S.Y. Bancorp, Inc. as of and for the periods presented in the Report.

 

Date:	August 13, 2002	By:	/s/ David H. Brooks
			David H. Brooks, Chairman
			and Chief Executive Officer
Date:	August 13, 2002	By:	/s/ David P. Heintzman
			David P. Heintzman, President
Date:	August 13, 2002	By:	/s/ Nancy B. Davis
			Nancy B. Davis, Executive
			Vice President, Treasurer and
			Chief Financial Officer

 

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