FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 30, 2004

 

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

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 –

13,882,792 shares issued and outstanding at November 2, 2004

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

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

 

•		Unaudited Condensed Consolidated Balance Sheets September 30, 2004 and December 31, 2003
•		Unaudited Condensed Consolidated Statements of Income for the three months ended September 30, 2004 and 2003
•		Unaudited Condensed Consolidated Statements of Income for the nine months ended September 30, 2004 and 2003
•		Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
•		Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2004
•		Unaudited Condensed Consolidated Statement of Comprehensive Income for the three months ended September 30, 2004 and 2003
•		Unaudited Condensed Consolidated Statement of Comprehensive Income for the nine months ended September 30, 2004 and 2003
•		Notes to Unaudited Condensed Consolidated Financial Statements

 

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Balance Sheets

September 30, 2004 and December 31, 2003

(In thousands, except share data)

 

		September 30, 2004					December 31, 2003
Assets
Cash and due from banks		$			29,046		31,911
Federal funds sold		9,830					2,165
Mortgage loans held for sale		3,118					3,157
Securities available for sale (amortized cost of $155,321 in 2004 and $152,951 in 2003)		157,691					155,691
Securities held to maturity (approximate fair value of $5,631 in 2004 and $6,244 in 2003)		5,390					5,915
Loans		932,812					886,153
Less allowance for loan losses		12,483					11,798
Net loans		920,329					874,355
Premises and equipment, net		26,418					24,785
Accrued interest receivable and other assets		40,921					20,542
Total assets		$			1,192,743		1,118,521
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing		$		164,925			143,901
Interest bearing		757,092					737,965
Total deposits		922,017					881,866
Securities sold under agreements to repurchase and federal funds purchased		85,395					92,102
Other short-term borrowings		1,286					1,232
Accrued interest payable and other liabilities		19,736					22,078
Federal Home Loan Bank advances		30,000					—
Subordinated debentures		20,799					20,829
Total liabilities		1,079,233					1,018,107
Stockholders’ equity:
Preferred stock, no par value; 1,000,000 shares authorized; no shares issued or outstanding		—					—
Common stock, no par value; 20,000,000 shares authorized; 13,882,792 and 13,575,316 shares issued and outstanding in 2004 and 2003, respectively		7,152					6,128
Surplus		18,335					16,153
Retained earnings		86,791					76,659
Accumulated other comprehensive income		1,232					1,474
Total stockholders’ equity		113,510					100,414
Total liabilities and stockholders’ equity		$	1,192,743				1,118,521

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Income

For the three months ended September 30, 2004 and 2003

(In thousands, except share and per share data)

 

		2004			2003
Interest income:
Loans		$	13,641		13,540
Federal funds sold		87			90
Mortgage loans held for sale		53			250
Securities - taxable		983			951
Securities - tax-exempt		357			278
Total interest income		15,121			15,109
Interest expense:
Deposits		3,326			3,564
Securities sold under agreements to repurchase and federal funds purchased		239			146
Other short-term borrowings		2			3
Federal Home Loan Bank advances		160			—
Subordinated debentures		466			466
Total interest expense		4,193			4,179
Net interest income		10,928			10,930
Provision for loan losses		180			300
Net interest income after provision for loan losses		10,748			10,630
Non-interest income:
Investment management and trust services		2,361			2,071
Service charges on deposit accounts		2,323			2,205
Bankcard transaction revenue		337			246
Gains on sales of mortgage loans held for sale		235			739
Gains on sales of securities available for sale		—			10
Brokerage commissions and fees		371			372
Other		608			649
Total non-interest income		6,235			6,292
Non-interest expenses:
Salaries and employee benefits		5,236			5,504
Net occupancy expense		803			677
Data processing expense		870			794
Furniture and equipment expense		314			273
State bank taxes		306			270
Other		2,173			2,005
Total non-interest expenses		9,702			9,523
Income before income taxes		7,281			7,399
Income tax expense		2,310			2,418
Net income		$	4,971		4,981
Net income per share:
Basic		$	0.36		0.37
Diluted		$	0.35		0.36
Average common shares:
Basic		13,843,237			13,499,811
Diluted		14,191,637			13,972,646

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Income

For the nine months ended September 30, 2004 and 2003

(In thousands, except share and per share data)

 

		2004			2003
Interest income:
Loans		$	40,233		40,637
Federal funds sold		155			298
Mortgage loans held for sale		162			650
Securities - taxable		3,026			2,759
Securities - tax-exempt		1,073			799
Total interest income		44,649			45,143
Interest expense:
Deposits		9,335			11,437
Securities sold under agreements to repurchase and federal funds purchased		609			474
Other short-term borrowings		6			6
Federal Home Loan Bank advances		383			—
Subordinated debentures		1,397			1,398
Total interest expense		11,730			13,315
Net interest income		32,919			31,828
Provision for loan losses		1,490			1,900
Net interest income after provision for loan losses		31,429			29,928
Non-interest income:
Investment management and trust services		7,017			6,156
Service charges on deposit accounts		6,761			6,184
Bankcard transaction revenue		895			781
Gains on sales of mortgage loans held for sale		845			2,175
Gains on sales of securities available for sale		—			10
Brokerage commissions and fees		1,281			913
Other		1,676			1,873
Total non-interest income		18,475			18,092
Non-interest expenses:
Salaries and employee benefits		16,603			16,154
Net occupancy expense		2,190			1,910
Data processing expense		2,545			2,550
Furniture and equipment expense		872			753
State bank taxes		883			818
Other		6,239			6,219
Total non-interest expenses		29,332			28,404
Income before income taxes		20,572			19,616
Income tax expense		6,574			6,369
Net income		$	13,998		13,247
Net income per share:
Basic		$	1.02		0.98
Diluted		$	0.99		0.95
Average common shares:
Basic		13,759,898			13,468,824
Diluted		14,152,961			13,952,431

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2004 and 2003

(In thousands)

 

		2004			2003
Operating activities:
Net income		$	13,998		13,247
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,490			1,900
Depreciation, amortization and accretion, net		2,330			2,134
Gains on sales of mortgage loans held for sale		(845		)	(2,175	)
Origination of mortgage loans held for sale		(157,720		)	(205,531	)
Proceeds from sale of mortgage loans held for sale		158,604			224,357
Gains on sales of securities available for sale		—			(10	)
Loss on the sale of premises and equipment		4			—
Loss on the sale of other real estate		62			24
Income tax benefit of stock options exercised		660			335
Increase in accrued interest receivable and other assets		(22,329		)	(9,773	)
(Decrease) increase in accrued interest payable and other liabilities		(2,644		)	1,908
Net cash (used) provided by operating activities		(6,390		)	26,416
Investing activities:
Net (increase) decrease in federal funds sold		(7,665		)	4,496
Purchases of securities available for sale		(91,827		)	(105,911	)
Proceeds from sales of securities available for sale		—			1,014
Proceeds from maturities of securities available for sale		89,358			49,539
Proceeds from maturities of securities held to maturity		524			3,284
Net increase in loans		(46,594		)	(39,746	)
Purchases of premises and equipment		(3,868		)	(4,708	)
Proceeds from sales of other real estate		1,147			976
Net cash used by investing activities		(58,925		)	(91,056	)
Financing activities:
Net increase in deposits		40,151			33,563
Net (decrease) increase in securities sold under agreements to repurchase and federal funds purchased		(6,707		)	29,978
Net increase (decrease) in other short-term borrowings		54			(652	)
Proceeds of Federal Home Loan Bank advances		30,000			—
Repayments of subordinated debentures		(30		)	(30	)
Issuance of common stock for options exercised, dividend reinvestment plan and employee benefit plans		2,774			921
Common stock repurchases		(228		)	(41	)
Cash dividends paid		(3,564		)	(2,901	)
Net cash provided by financing activities		62,450			60,838
Net increase (decrease) in cash and cash equivalents		(2,865		)	(3,802	)
Cash and cash equivalents at beginning of period		31,911			34,918
Cash and cash equivalents at end of period		$	29,046		31,116
Supplemental cash flow information:
Income tax payments		$	5,590		5,550
Cash paid for interest		$	11,661		13,244

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2004

(In thousands, except share and per share data)

 

							Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
		Common Stock
		Number of Shares		Amount
Balance December 31, 2003		13,575,316		$	6,128		$	16,153		$	76,659		$	1,474		$	100,414
Net income		—		—			—			13,998			—			13,998
Change in other comprehensive income (loss), net of tax		—		—			—			—			(242		)	(242		)
Shares issued for stock options exercised, dividend reinvestment plan and employee benefit plans		318,076		1,074			2,360			—			—			3,434
Cash dividends, $0.28 per share		—		—			—			(3,866		)	—			(3,866		)
Shares repurchased		(10,600	)	(50		)	(178		)	—			—			(228		)
Balance September 30, 2004		13,882,792		$	7,152		$	18,335		$	86,791		$	1,232		$	113,510

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Comprehensive Income

For the three months ended September 30, 2004 and 2003

(In thousands)

 

		2004			2003
Net income		$	4,971		4,981
Other comprehensive income, net of tax:
Change in unrealized holding gains (losses) on securities available for sale arising during the period		2,059			(907	)
Less reclassification adjustment for gains included in net income		—			7
Other comprehensive income (loss)		2,059			(900	)
Comprehensive income		$	7,030		4,081

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Comprehensive Income

For the nine months ended September 30, 2004 and 2003

(In thousands)

 

		2004			2003
Net income		$	13,998		13,247
Other comprehensive income, net of tax:
Change in unrealized holding losses on securities available for sale arising during the period		(242		)	(482	)
Less reclassification adjustment for gains included in net income		—			7
Other comprehensive loss		(242		)	(475	)
Comprehensive income		$	13,756		12,772

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8

 

S.Y. BANCORP, INC. AND SUBSIDIARY

 

Notes to Unaudited Condensed 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 U.S. generally accepted accounting principles for complete financial statements.  The consolidated financial statements of S.Y. Bancorp, Inc. (Bancorp) and its subsidiary reflect all adjustments (consisting only of adjustments of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods.

 

The unaudited consolidated financial statements include the accounts of S.Y. Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (Bank).  All significant intercompany transactions have been eliminated in consolidation.  Bancorp also owns S.Y. Bancorp Capital Trust I (Trust), a Delaware statutory business trust that is a 100% owned finance subsidiary.  Due to a recent accounting pronouncement, the Trust is no longer consolidated in the consolidated financial statements of Bancorp.  See note 4 to the consolidated financial statements below for more information on the Trust.

 

A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2003 included in S.Y. Bancorp, Inc.’s Annual Report on Form 10-K.

 

Interim results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results for the entire year.

 

Critical Accounting Policies

 

Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of Bancorp’s results of operations and discussed this conclusion with the Audit Committee of the board of directors.  Since the application of this policy requires significant management assumptions and estimates, it could result in materially different amounts to be reported if conditions or underlying circumstances were to change.  The accounting policy related to the allowance for loan losses is applicable to the commercial and retail banking segment of Bancorp.

 

Stock-Based Compensation

 

As permitted by Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” Bancorp will continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock-Based Compensation,” for all stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.

 

No stock based compensation is reflected in net income because all options granted under the current stock incentive plan have an exercise price equal to the market price of Bancorp’s stock at the grant date.  Bancorp discloses proforma net income and earnings per share in the notes to its consolidated financial statements as if compensation were measured at the date of grant based on the fair value of the award and recognized over the service period.

 

9

 

Bancorp’s as reported and proforma earnings per share information for the three months ended September 30 follows:

 

		Three Months Ended September 30
(In thousands, except per share data)		2004			2003
Net income, as reported		$	4,971		$	4,981
Less: stock-based compensation expense determined under fair value method, net of tax		67			54
Proforma net income		$	4,904		$	4,927
Basic EPS:
As reported		$	0.36		$	0.37
Proforma		0.35			0.36
Diluted EPS:
As reported		0.35			0.36
Proforma		0.35			0.35

 

Bancorp’s as reported and proforma earnings per share information for the nine months ended September 30 follows:

 

		Nine Months Ended September 30
(In thousands, except per share data)		2004			2003
Net income, as reported		$	13,998		$	13,247
Less: stock-based compensation expense determined under fair value method, net of tax		199			163
Proforma net income		$	13,799		$	13,084
Basic EPS:
As reported		$	1.02		$	0.98
Proforma		1.00			0.97
Diluted EPS:
As reported		0.99			0.95
Proforma		0.97			0.94

 

10

 

Option grant activity for the first three quarters of 2004 and 2003 is summarized as follows.  All options were granted at a strike price equal to the market value of Bancorp’s common stock at the time of grant and are subject to a vesting schedule of 20% per year.  Options were granted in the second quarter of 2004 to acquire 9,000 shares of common stock at an average strike price of $21.40.  The average fair value of each of these options was $4.98.  Options were also granted in the third quarter of 2003 to acquire 2,000 shares of common stock at a strike price of $18.95.  The fair value of each of these options was $4.16.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

 

		2004		2003
Assumptions Used in Option Valuation
Dividend yield		1.59	%	1.53	%
Expected volatility		17.25	%	16.81	%
Risk free interest rate		4.25	%	3.78	%
Expected life of options (in years)		7.0		7.0

 

(2)                                 Allowance for Loan Losses

 

An analysis of the changes in the allowance for loan losses for the nine months ended September 30 follows:

 

(In thousands)		2004				2003
Beginning balance		$		11,798		11,705
Provision for loan losses		1,490				1,900
Loans charged off		(1,334			)	(2,843	)
Recoveries		529				603
Ending balance		$	12,483			11,365

 

(3)                                 Federal Home Loan Bank Advances

 

Under a blanket collateral agreement with the Federal Home Loan Bank of Cincinnati and secured by certain residential real estate loans, the Bank borrowed $30,000,000 via three separate fixed rate, non-callable advances of $10,000,000 each in the first quarter of 2004.  The advances have terms of one, two and three years, respectively, with a weighted average rate of 2.14%.  Interest payments are due monthly, with principal due at maturity.

 

(4)                                 Subordinated Debentures

 

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 S.Y. Bancorp Capital Trust I is a $20.0 million subordinated debenture of Bancorp.  The subordinated debenture bears interest at the rate of 9.00% and matures

 

11

 

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.

 

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.

 

Prior to 2003, the Trust was consolidated in Bancorp’s financial statements, with the trust preferred securities issued by the Trust reported in liabilities as “Long Term Debt – Trust Preferred Securities” and the subordinated debentures eliminated in consolidation.  Under FASB Interpretation No. 46, as revised in December 2003, the Trust is no longer consolidated with Bancorp.  Accordingly, Bancorp does not report the securities issued by the Trust as liabilities, and instead reports as liabilities the subordinated debentures issued by Bancorp and held by the Trust, as these are no longer eliminated in consolidation.  The amount of the subordinated debentures as of September 30, 2004 and December 31, 2003 was $20,619,000.  In applying this FASB Interpretation, Bancorp recorded the investment in the common securities issued by the Trust and a corresponding obligation of the Trust’s subordinated debentures as well as interest income and interest expense on this investment and obligation.  The application of this FASB Interpretation has been reflected in all applicable prior periods.

 

The Bank also had subordinated debentures outstanding amounting to $180,000 at September 30, 2004 and $210,000 at December 31, 2003. Interest due on these debentures is at a variable rate equal to one percent less than the Bank’s prime rate adjusted annually on January 1.  For 2004, the rate on these debentures was 3.00% and for 2003 the rate was 3.25%. The debentures are subordinated to the claims of creditors and depositors of the Bank and are subject to redemption by the Bank at the principal amount outstanding, upon the earlier of the death of the registered owners, or an event of default by the registered owners with respect to loans from the Bank.  While the debentures mature in 2049, the owners may redeem the debentures at any time.

 

(5)                                 Intangible Assets

 

Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”), requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be 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.

 

12

 

(6)                                 Defined Benefit Retirement Plan

 

The Bank sponsors an unfunded, non-qualified, defined benefit retirement plan for certain key officers.  Benefits vest based on years of service.  The Bank does not make contributions to this plan.  Information about the components of the net periodic benefit cost of the defined benefit plan follows:

 

		Three Months Ended September 30,
(Dollars in thousands)		2004			2003
Components of net periodic benefit cost:
Service cost		$	—		$	—
Interest cost		30			30
Expected return on plan assets		—			—
Amortization of prior service cost		1			2
Amortization of the net (gain) loss		8			5
Net periodic benefit cost		$	39		$	37

 

		Nine Months Ended September 30,
(Dollars in thousands)		2004			2003
Components of net periodic benefit cost:
Service cost		$	—		$	—
Interest cost		90			90
Expected return on plan assets		—			—
Amortization of prior service cost		4			5
Amortization of the net (gain) loss		24			16
Net periodic benefit cost		$	118		$	111

 

(7)                                 Commitments to Extend Credit

 

As of September 30, 2004, Bancorp had various commitments outstanding that arose in the normal course of business, such as standby letters of credit and commitments to extend credit, which are properly not reflected in the consolidated financial statements. In management’s opinion, commitments to extend credit of $248,690,000, including standby letters of credit of $14,221,000, represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of September 30, 2004.  Commitments to extend credit were $198,907,000, including letters of credit of $11,854,000, as of December 31, 2003.  Bancorp’s exposure to credit loss in the event of nonperformance by the other party to these commitments is represented by the contractual amount of these instruments. Bancorp uses the same credit and collateral policies in making

 

13

 

commitments and conditional guarantees as for on-balance sheet instruments.  At September 30, 2004, no amounts have been accrued in the consolidated financial statements related to these instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

Standby letters of credit and financial guarantees written are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements.

 

(8)                                 Preferred Stock

 

At Bancorp’s annual meeting of shareholders held in April 2003, the shareholders approved an amendment to the Articles of Incorporation to create a class of preferred stock and authorize 1,000,000 shares of this preferred stock with no par value.  The relative rights, preferences and other terms of this stock or any series within the class will be determined by the Board of Directors prior to any issuance.  Some of this preferred stock will be used in connection with a shareholders’ rights plan upon the occurrence of certain triggering events.  None of this stock has been issued as of September 30, 2004.

 

(9)                                 Net Income Per Share

 

The following table reflects, for the three and nine month periods ended September 30, 2004 and 2003, 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 September 30					Nine Months Ended September 30
		2004			2003		2004		2003
Net income, basic and diluted		$	4,971		4,981		13,998		13,247
Average shares outstanding		13,843			13,500		13,760		13,468
Effect of dilutive securities		349			473		393		484
Average shares outstanding including dilutive securities		14,192			13,973		14,153		13,952
Net income per share, basic		$	0.36		0.37		1.02		0.98
Net income per share, diluted		$	0.35		0.36		0.99		0.95

 

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(10)                          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 loan 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.

 

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 quarter and nine months ended September 30, 2004 and 2003 follows:

 

		Three Months Ended September 30					Nine Months Ended September 30
(In thousands)		2004			2003		2004		2003
Net interest income:
Commercial and retail banking		$	10,694		10,459		32,101		30,472
Investment management and trust		131			268		519		774
Mortgage banking		103			203		299		582
Total		$	10,928		10,930		32,919		31,828
Non-interest income:
Commercial and retail banking		$	3,149		2,756		8,904		7,893
Investment management and trust		2,732			2,443		8,298		7,069
Mortgage banking		354			1,093		1,273		3,130
Total		$	6,235		6,292		18,475		18,092
Net income:
Commercial and retail banking		$	4,031		3,748		11,345		9,809
Investment management and trust		942			823		2,572		2,329
Mortgage banking		(2		)	410		81		1,109
Total		$	4,971		4,981		13,998		13,247

 

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

 

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

 

This item discusses the results of operations for S.Y. Bancorp, Inc. (Bancorp), and its subsidiary, Stock Yards Bank & Trust Company for the three and nine month periods ended September 30, 2004 and compares those periods with the same periods of the previous year.  Unless otherwise indicated, all references in this discussion to the “Bank” include Bancorp.  In addition, the discussion describes the significant changes in the financial condition of Bancorp and the Bank that have occurred during the first nine months of 2004 compared to December 31, 2003.  This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

 

This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties.  Although Bancorp believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate.  Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to the following: 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.

 

Overview of 2004 through September 30

 

The first nine months of 2004 proved the value of our Company’s diverse revenue stream and our focus on expense control.  As business loan growth during the period was below our historic rates and our mortgage banking business struggled with the rise in mortgage rates, Bancorp was able to show solid growth in other areas such as investment management and trust, brokerage and service charges on deposit accounts.  These factors helped Bancorp complete the first three quarters of the year with net income exceeding the comparable period of 2003 by 5.7%.

 

As is the case with most banks, the primary source of Bancorp’s revenue is net interest income and fees from various financial services provided to customers.  Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities.  Loan volume and the interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans, and the rates on those deposits directly impacts profitability. Business volumes are influenced by overall economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.  Net interest income for the first three quarters of 2004 increased 3.4% as compared to the prior year due to a reduction in interest expense.

 

Slower than desired business loan growth was an important factor in the results for the first nine months of 2004.  It appears many customers have generally maintained a cautious stance toward new borrowings, which, together with increased competitive conditions, restrained loan growth.  Despite slow loan volume during most of 2004, loan growth in the third quarter of 2004 represented the Company’s best quarter-to-quarter increase since 2001.  The trend seen over the last quarter provides a hopeful sign that customers are becoming more confident about their future plans.  To help fund expected loan growth, Company management pursued low cost funding via borrowings from the Federal Home Loan Bank during the first quarter of 2004.  These borrowings were a more economic funding alternative than higher cost certificates of deposit.  During the third quarter of 2004, Management pursued certificates of deposit more actively than during the first half of the year.

 

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As compared to peers, Bancorp has a higher than average proportion of non-interest revenues which, in addition to net interest income, has helped to fuel net income growth. While total non-interest income grew only 2.1% in the first nine months of 2004 as compared to the same period of 2003, increasing fees from investment management and trust fees, service charges on deposit accounts and brokerage revenues offset sharp declines in gains on sales of mortgage loans.

 

Bancorp continues to expand its footprint and look for complementary opportunities in new markets.  During the second quarter of 2004, Bancorp opened its first branch location in Indianapolis.  In the third quarter Bancorp followed that branch opening with an investment in Indiana Business Bank (IBB), an Indianapolis based, state chartered de novo bank.  Bancorp’s investment of $1.4 million represents less than 10% ownership in IBB.  Bancorp and IBB expect to enter into participation agreements for loans that exceed IBB’s lending limits or internal policies.  We believe these steps will augment our long-term strategy of building a larger market position in the Indianapolis area.

 

Results in 2004 were positively affected by a lower provision for loan losses.  Bancorp’s process of evaluating the credit risk inherent in the loan portfolio considered data including non-performing loans, past due loans, charge offs, internal watch lists, the nature of our loan portfolio and economic data.  Net charge-offs were relatively small in the first nine months of 2004.  The third quarter of 2004 was the fifth consecutive quarter that net charge-offs represented three basis points or less of average loans outstanding.  This compares favorably with an average quarterly ratio of net charge-offs to average loans of approximately 12 basis points for the five previous quarters.  Non-performing loans, while down slightly from the prior year, were up from the second quarter of 2004.  Taking into consideration all relevant data, management considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at September 30, 2004.

 

The following sections will provide more details on subjects presented in this overview.

 

(a)               Results Of Operations

 

Net income of $4,971,000 for the three months ended September 30, 2004 decreased $10,000 or 0.2% from $4,981,000 for the comparable 2003 period.  Basic net income per share was $0.36 for the third quarter of 2004, a decrease of 2.7% from the $0.37 for the same period in 2003.  Net income per share on a diluted basis was $0.35 for the third quarter of 2004 compared to $0.36 for the third quarter of 2003; a 2.8% decrease.  Annualized return on average assets and annualized return on average stockholders’ equity were 1.71% and 17.90%, respectively, for the third quarter of 2004, compared to 1.78% and 20.76%, respectively, for the same period in 2003.

 

Net income of $13,998,000 for the nine months ended September 30, 2004 increased $751,000 or 5.7% from $13,247,000 for the comparable 2003 period.  Basic net income per share was $1.02 for the first nine months of 2004, an increase of 4.1% from the $0.98 for the same period in 2003. Net income per share on a diluted basis was $0.99 for the first nine months of 2004 compared to $0.95 for the first nine months of 2003.  This represents a 4.2% increase.  Annualized return on average assets and annualized return on average stockholders’ equity were 1.65% and 17.44%, respectively, for the first nine months of 2004, compared to 1.65% and 19.25%, respectively, for the same period in 2003.

 

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Net Interest Income

 

The following tables present the average balance sheets for the three and nine month periods ended September 30, 2004 and 2003 along with the related calculation of tax equivalent net interest income, net interest margin and net interest spread for the related periods.  See the notes following the tables for further explanation.

 

		For the three months ended September 30, 2004									For the three months ended September 30, 2003
(Dollars in thousands)		Average Balances				Interest			Average Rate		Average Balances			Interest			Average Rate
Earning assets
Federal funds sold		$		26,521		$	87		1.31	%	$	35,088		$	90		1.02	%
Mortgage loans held for sale		4,003				53			5.27	%	19,490			250			5.09	%
Securities
Taxable		104,452				983			3.74	%	102,467			951			3.68	%
Tax-exempt		37,595				511			5.41	%	26,044			398			6.06	%
Loans, net of unearned income		906,833				13,706			6.01	%	859,540			13,601			6.28	%
Total earning assets		1,079,404				15,340			5.65	%	1,042,629			15,290			5.82	%
Less allowance for loan losses		12,947									11,800
		1,066,457									1,030,829
Non-earning assets
Cash and due from banks		32,178									33,460
Premises and equipment		26,210									24,676
Accrued interest receivable and other assets		32,527									20,860
Total assets		$	1,157,372								$	1,109,825

 

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