UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934
S.Y. BANCORP, INC. 1040 East Main StreetLouisville, Kentucky 40206(502) 582-2571
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of registrant's voting stock (Common Stock, no par value) held by non-affiliates of the registrant as of February 28, 2001, was $119,850,000.
The number of shares of registrant's Common Stock, no par value, outstanding as of February 28, 2001, was 6,651,552.
Documents Incorporated by Reference
Portions of Registrant's definitive proxy statement related to Registrant's Annual Meeting of Stockholders to be held on April 25, 2001 (the "Proxy Statement"), are incorporated by reference into Part III of this Form 10-K.
S.Y. BANCORP, INC. Form 10-K Index
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Part I
Item 1. Business
S. Y. Bancorp, Inc. ("Bancorp"), was incorporated in 1988 and is a Kentucky corporation headquartered in Louisville, Kentucky. Bancorp is a bank holding company registered with, and subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System. Bancorp has one subsidiary, Stock Yards Bank & Trust Company. The subsidiary is wholly owned and is a state chartered bank. Bancorp conducts no active business operations; accordingly, the business of Bancorp is substantially the same as that of its subsidiary bank.
Stock Yards Bank & Trust Company
Stock Yards Bank & Trust Company ("the Bank") was originally chartered in 1904. In 1972, the Bank was granted full trust powers. In 1989, the Bank began to branch and thereby expand its retail business. The Bank's historical market niche has been providing commercial loans to small and mid-size companies. The Bank's staff focuses on establishing and maintaining long term relationships with customers. The Bank engages in a wide range of commercial and personal banking activities, including checking, savings and time deposit accounts; making of commercial, industrial, real estate, and consumer loans; issuance of letters of credit; and rental of safe deposit boxes. The Bank also provides a wide range of personal trust services. The Bank operates a mortgage company as a division of the Bank. This division originates residential mortgage loans and sells the loans in the secondary market. The Bank offers full service brokerage products through an affiliation with a third party. In addition, the Bank offers Visa credit card services through an agreement with a non-affiliated bank. Customers of the Bank have access to automatic teller machines through a regional network.
The Bank actively competes with other local and regional commercial banks and financial services institutions such as credit unions, savings and loans associations, insurance companies, brokerage companies, finance companies and mutual funds. Many banks and other financial services institutions with which the Bank competes are substantially larger than the Bank. These larger competitors have broader geographic markets, higher lending limits, sell broader product lines and make more effective use of advertising than can the Bank. While primarily serving Jefferson County, Kentucky, the Bank also serves customers residing in the adjacent Kentucky counties of Oldham, Shelby and Bullitt and in southern Indiana. In a 1996 acquisition, Bancorp established its first southern Indiana branch, thus expanding to another part of the Louisville, Kentucky metropolitan area. Factors affecting the Bank's ability to compete effectively include pricing, product availability, and service.
The Bank has fifteen banking centers including the main office. Some of these locations are owned while others are leased. See "ITEM 2. PROPERTIES."
At December 31, 2000, the Bank had 327 full-time equivalent employees. Employees are not subject to a collective bargaining agreement. Bancorp and the Bank consider their relationships with employees to be good.
See Note 20 to Bancorp's consolidated financial statements for the year ended December 31, 2000 (page 44 herein) for information relating to the Bank's business segments.
Supervision and Regulation
Bank holding companies and commercial banks are extensively regulated under both federal and state law. Any change in applicable law or regulation may have a material effect on the business and prospects of Bancorp and the Bank.
Bancorp, as a registered bank holding company, is subject to the supervision of and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In addition, Bancorp is
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subject to the provisions of Kentucky's banking laws regulating bank acquisitions and certain activities of controlling bank shareholders.
The Bank is subject to the supervision of and regular examination by the Federal Deposit Insurance Corporation and the Kentucky Department of Financial Institutions. The Federal Deposit Insurance Corporation insures the deposits of the bank to the current maximum of $100,000 per depositor.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("the 1994 Act") removed state law barriers to interstate bank acquisitions and permits the consolidation of interstate banking operations. Under the 1994 Act, adequately capitalized and managed bank holding companies may acquire banks in any state, subject to Community Reinvestment Act compliance, compliance with federal and state antitrust laws and deposit concentration limits, and subject to any state laws restricting the transaction. Kentucky banks are also permitted to acquire a branch in another state if permitted by law of the other state. Kentucky currently does not permit de novo branching by out-of-state banks into Kentucky, and it does not permit an out-of-state bank to acquire a bank in Kentucky that has been in existence less than five years.
The Gramm-Leach-Bliley Act ("the 1999 Act") repealed the Depression-era barrier between commercial and investment banking established by the Glass-Steagall Act, as well as the prohibition on the mixing of banking and insurance established by the Bank Holding Company Act of 1956. The 1999 Act allows for affiliations among banks, securities firms and insurance companies by means of a financial holding company ("FHC"). In most cases, the creation of an FHC is a simple election and notice to the Federal Reserve Board. The 1999 Act requires that, at the time of establishment of an FHC, all depository institutions within that corporate group must be "well managed" and "well capitalized" and must have received a rating of "satisfactory" or better under its most recent Community Reinvestment Act examination. Further, non-banking financial firms (for example an insurance company or securities firm) may establish an FHC and acquire a depository institution. While the distinction between banks and non-banking financial firms has been blurring over recent years, the 1999 Act will make it less cumbersome for banks to offer services "financial in nature" but beyond traditional commercial banking activities. Likewise, non-banking financial firms may find it easier to offer services which have, heretofore, been provided primarily by depository institutions.
Item 2. Properties
The principal offices of Bancorp and the Bank are located at 1040 East Main Street, Louisville, Kentucky. Adjacent to the main location is the Bank's operations center. In addition to the main office complex, the Bank owned seven branch properties at December 31, 2000 (one of which is located on leased land). The Bank also leased seven branch facilities. Of the fifteen banking locations, thirteen are located in Louisville and two are located in nearby southern Indiana. See Notes 5 and 15 to Bancorp's consolidated financial statements for the year ended December 31, 2000, for additional information relating to amounts invested in premises, equipment and lease commitments.
Item 3. Legal Proceedings
See Note 15 to Bancorp's consolidated financial statements for the year ended December 31, 2000, for information relating to legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
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Executive Officers of the Registrant
The following table lists the names and ages (as of December 31, 2000) of all current executive officers of Bancorp. Each executive officer is appointed by the Bancorp's Board of Directors to serve at the pleasure of the Board. There is no arrangement or understanding between any executive officer of Bancorp and any other person(s) pursuant to which he/she was or is to be selected as an officer.
Mr. Brooks was appointed Chairman and Chief Executive Officer of Bancorp and the Bank in 1993. Prior thereto, he was President of Bancorp and the Bank.
Mr. Heintzman was appointed President of Bancorp and the Bank in 1993. Prior thereto, he served as Treasurer and Chief Financial Officer of Bancorp and Executive Vice President of the Bank.
Ms. Thompson was appointed Executive Vice President of Bancorp and the Bank in 1996. She joined the Bank in 1992 as Senior Vice President and is Manager of the Investment Management and Trust Department.
Mr. Smith was appointed Executive Vice President of the Bank in 1996. Prior thereto, he was Senior Vice President of the Bank. He is primarily responsible for the commercial lending area of the Bank.
Mr. Hoeck joined the Bank as Executive Vice President in 1998. He is primarily responsible for the retail and marketing areas of the Bank. Prior to joining the Bank, Mr. Hoeck was an Executive Vice President for PNC Bank and the Retail Market Manager for the Kentucky and Indiana markets.
Ms. Davis was appointed Executive Vice President of Bancorp and the Bank in 1999. Prior thereto, she was Senior Vice President of Bancorp and the Bank. She was appointed Chief Financial Officer of Bancorp in 1993.
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Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Bancorp's common stock is traded on the American Stock Exchange under the ticker symbol SYI. The table below sets forth the quarterly high and low market prices of Bancorp's common stock and dividends declared per share. The payment of dividends by the Bank to Bancorp is subject to the restriction described in Note 14 to the consolidated financial statements. On December 31, 2000, Bancorp had 777 shareholders of record.
Item 6. Selected Financial Data
Selected Consolidated Financial Data
Per share information has been adjusted to reflect stock splits and stock dividends.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to provide information as to the analysis of the consolidated financial condition and results of operations of S.Y. Bancorp, Inc. (Bancorp) and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (the Bank). Bancorp, incorporated in 1988, has no active business operations. Thus, Bancorp's business is substantially the same as that of the Bank. The Bank has operated continuously since it opened in 1904. The Bank conducted business at one location for 85 years and then began branching. At December 31, 2000, the Bank had fifteen locations. The combined effect of added convenience with the Bank's focus on flexible, attentive customer service has
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been key to the Bank's growth and profitability. The wide range of services added by the wealth management group (investment management and trust, private banking, and brokerage) and by the mortgage department helps support the corporate philosophy of capitalizing on full service customer relationships.
This report contains forward-looking statements under the Private Securities Litigation Reform act that involve risks and uncertainties. Although Bancorp believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions both generally and more specifically in the market in which Bancorp and its subsidiary operate; competition for Bancorp's customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of Bancorp's customers; other risks detailed in Bancorp's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.
This discussion should be read in conjunction with Bancorp's consolidated financial statements and accompanying notes and other schedules presented elsewhere in this report.
Results of Operations
Net income was $11,592,000 or $1.70 per share on a diluted basis in 2000. This compares to $9,706,000 or $1.41 per share in 1999 and $8,218,000 or $1.21 per share in 1998. The increase in 2000 net income was attributable to growth in both net interest income and non-interest income which was partially offset by increased non-interest expenses. Earnings include a 13.5% increase in fully taxable equivalent net interest income and a 22.1% increase in non-interest income. Fees for investment management and trust services, service charges on deposit accounts, and other non-interest income increased for the year. Partially offsetting these increases, gains on sales of mortgage loans available for sale and gains on sales of securities available for sale decreased in 2000. Non-interest expenses increased 10.7%. Non-interest expenses increased in all categories reflective of continued expansion of the banking center network.
The following paragraphs provide a more detailed analysis of the significant factors affecting operating results.
Net Interest Income
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.
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Comparative information regarding net interest income follows:
Prime rate is included above to provide a general indication of the interest rate environment in which the Bank operates. The Bank's variable rate loans are indexed to prime rate and reprice as the prime rate changes.
Asset/Liability Management and Interest Rate Risk
Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By using both on and off-balance sheet financial instruments, Bank management evaluates interest rate sensitivity while attempting to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.
Bancorp uses an earnings simulation model to measure and evaluate the impact of changing interest rates on earnings. The simulation model is designed to reflect the dynamics of all interest earning assets, interest bearing liabilities, and off-balance sheet financial instruments, combining factors affecting rate sensitivity into a one year forecast. By forecasting management's estimate of the most likely rate environment and adjusting those rates up and down the model can reveal approximate interest rate risk exposure. The December 31, 2000 simulation analysis indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in interest rates would have a negative effect on net interest income.
Interest Rate Simulation Sensitivity Analysis
To assist in achieving a desired level of interest rate sensitivity, management has in the past entered into derivative financial instruments which are designed to mitigate the effect of changes in interest rates. Derivative financial instruments can be a cost and capital efficient method of modifying interest rate risk sensitivity. The Bank had no interest rate contracts at December 31, 2000. See Note 16 to the consolidated financial statements.
The following table presents the increases in net interest income due to changes in rate and volume computed on a tax equivalent basis and indicates how net interest income in 2000 and 1999 was
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impacted by volume increases and the lower average interest rate environment. The tax equivalent adjustments are based on a 35% tax rate. The change in interest due to both rate and volume has been allocated to the change due to rate and change due to volume in proportion to the relationship of the absolute dollar amounts of the change in each.
Taxable Equivalent Rate/Volume Analysis
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Provision for Loan Losses
In determining the provision for loan losses charged to expense, management considers many factors. Among these are the quality of the loan portfolio, previous loss experience, the size and composition of the loan portfolio and an assessment of the impact of current economic conditions on borrowers' ability to pay. The provision for loan losses is summarized below:
The Bank's charge-off history has been below the levels of its peers and the loan portfolio is diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in the Louisville, Kentucky metropolitan area. The adequacy of the allowance is monitored on an ongoing basis and it is the opinion of management that the balance of the allowance for loan losses at December 31, 2000, is adequate to absorb losses inherent in the loan portfolio as of this date. See "Financial Condition—Allowance for Loan Losses" on page 16.
Non-Interest Income and Non-Interest Expenses
The following table provides a comparison of the components of non-interest income and expenses for 2000, 1999, and 1998. The table shows the dollar and percentage change from 1999 to 2000 and from 1998 to 1999. Below the table is a discussion of significant changes and trends.
The largest component of non-interest income is income from investment managment and trust services. This area of the bank continues to grow through attraction of new business, customer retention and market appreciation. At December 31, 2000 assets under managment totaled $1.056 billion compared to $914 million at December 31, 1999 and $770 million as of December 31, 1998. Included in these totals are the assets of the Bank's investment portfolio. These amounts were
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$77 million at year end 2000, $76 million at year end 1999, and $100 million at year end 1998. Growth in the department's assets include both personal and employee benefit accounts.
Growth in service charges on deposit accounts is primarily due to increased account volumes and a new overdraft service for retail customers. Opening new branch offices and promotion of retail accounts have presented opportunities for growth in deposit accounts and increased fee income. Additionally, in March 2000 the Bank began offering an overdraft service to retail depositors. The service allows checking customers meeting specific criteria to incur overdrafts up to a predetermined limit, generally $500. For each check paid resulting in our increasing an overdraft, the customer pays the standard overdraft chage. These fees totaled approximately $1.4 million for the year.
The Bank operates a mortgage banking company as a division of the Bank. This division originates residential mortgage loans and sells the loans in the secondary market. The division offers conventional, VA and FHA financing as well as a program for low income first time home buyers. Loans are made for both purchase and refinancing of homes. Virtually all loans originated by the mortgage banking company are sold in the secondary market with servicing rights released. Interest rates on conventional mortgage loans directly impact the volume of business transacted by the mortgage banking division. Favorable rates in 1998 and early 1999 stimulated home buying and refinancing, however, beginning in the second quarter of 1999 and continuing through 2000, rising rates resulted in lower levels of activity, particularly refinancing. The mortage company began origination and sale of sub-prime loans in 1998. This activity contributed $134,000 to the gains on sales of mortgage loans in 2000 and $212,000 in 1999. Investors commit to purchase both prime and sub-prime loans when such loans are originated, subject to verification of certain underwriting criteria. The Bank retains none of these sub-prime loans in its portfolio.
Salaries and benefits are the largest component of non-interest expenses. Increases in personnel expense arose in part from regular salary increases. Officer increases are effective January 1 and non-officer increases are effective on each individual's anniversary date. Also, the Bank continues to add employees to support growth. At December 31, 2000, the Bank had 327 full-time equivalent employees compared to 316 at the same date in 1999 and 275 for 1998. There are no significant obligations for post-retirement or post-employment benefits.
Net occupancy expenses have increased as the Bank has added banking centers. During late 2000, the Bank opened one location; during 1999 the Bank opened two. At December 31, 2000 the Bank had fifteen banking center locations including the main office. Furniture and equipment expenses have increased with the addition of banking centers. Further, the Bank continues to update computer equipment and software as technology advances. Costs of capital asset additions flow through the statement of income, over the lives of the assets, in the form of depreciation expense. Occupancy and furniture and equipment expenses increased at a lower rate in 2000 as a result of general awareness of the need to control non-interest expenses.
Other non-interest expenses have increased from numerous factors and reflect the Bank's growth. Among costs which increased significantly were delivery and communications.
Income Taxes
A three year comparison of income tax expense and effective tax rate follows:
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Financial Condition
Earning Assets and Interest Bearing Liabilities
Summary information with regard to Bancorp's financial condition follows:
The Bank has experienced significant growth over the last several years. Growth of average earning assets occurred primarily in the area of loans. Loan demand continued to be strong during 2000. From year end 1999 to year end 2000, commercial and industrial loans increased 17.9%. Construction and development loans increased 48.1%. Real estate mortgage loans increased 19.5%. Consumer loans increased 26.2%. Partially offsetting growth in loans was a decrease in federal funds sold and mortgage loans held for sale.
The increase in average interest bearing liabilities from 1999 to 2000 occurred primarily in interest bearing demand and time deposits. Time deposits showed the largest growth. The increase in time deposits can be primarily attributed to a retail certificates of deposit promotion in the fourth quarter of 2000 used to fund loan growth. An area of significant growth in 1999 which continued into 2000 was securities sold under agreements to repurchase. Commercial depositors have the opportunity to enter into a sweep agreement whereby excess demand deposit balances are transferred to a separate account. This balance is used to purchase securities sold under agreements to repurchase. In the fourth quarter of 1999, the Bank accepted up to $20 million in public funds from the Jefferson County, Kentucky Sheriff. These funds were generated from the collection of property taxes and were withdrawn from the Bank during January 2000.
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Average Balances and Interest Rates—Taxable Equivalent Basis
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Securities
The primary purpose of the securities portfolio is to provide another source of interest income as well as liquidity management. In managing the composition of the balance sheet, Bancorp seeks a balance among earnings sources and credit and liquidity considerations.
The carrying value of securities is summarized as follows:
The maturity distribution and weighted average interest rates of debt securities at December 31, 2000, are as follows:
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Loan Portfolio
Bancorp's primary source of income is interest on loans. The composition of loans as of the end of the last five years follows:
The following tables show the amounts of commercial and industrial loans, and construction and development loans, at December 31, 2000, 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.
Nonperforming Loans and Assets
Information summarizing nonperforming assets, including nonaccrual loans follows:
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The threshold at which loans are generally transferred to nonaccrual of interest status is 90 days past due unless they are well secured and in the process of collection. Interest income recorded on nonaccrual loans for 2000 totaled $32,000. Interest income that would have been recorded in 2000 if nonaccrual loans were on a current basis in accordance with their original terms was $271,000.
In addition to the nonperforming loans discussed above, there were loans for which payments were current or less than 90 days past due where borrowers are experiencing significant financial difficulties. These loans of approximately $1,527,000 are monitored by management and considered in determining the level of the allowance for loan losses. Management believes these loans do not present significant exposure to loss. The allowance for loan losses is discussed further under the heading "Provision for Loan Losses" on page 10.
Allowance for Loan Losses
An allowance for loan losses has been established to provide for loans which may not be fully repaid. Loan losses arise primarily from the loan portfolio, but may also be generated from other sources such as commitments to extend credit, guarantees, and standby letters of credit. The allowance for loan losses is increased by provisions charged to expense and decreased by charge-offs, net of recoveries. Loans are charged off by management when deemed uncollectible; however, collection efforts continue and future recoveries may occur.
The allowance is maintained at a level considered by management to be adequate to cover losses that are inherent in the loan portfolio. Factors considered include past loss experience, general economic conditions, and information about specific borrower situations including financial position and collateral values. Estimating inherent loss on any loan is subjective and ultimate losses may vary from current estimates. Estimates are reviewed periodically and adjustments are reported in income through the provision for loan losses in the periods in which they become known. The adequacy of the allowance for loan losses is monitored by the internal loan review staff and reported quarterly to the Audit Committee of the Board of Directors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of Bancorp's allowance for loan losses. Such agencies may require Bancorp to make additional provisions to the allowance based upon their judgements about information available to them at the time of their examinations. Management believes that the allowance for loan losses is adequate to absorb inherent losses on existing loans that may become uncollectible. See "Results of Operations—Provision for Loan Losses" on page 10.
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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.
The following table sets forth the allocation of the allowance for loan losses for the loan categories shown. Although specific allocations exist, the entire allowance is available to absorb losses in any particular loan category.
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The ratio of loans in each category to total outstanding loans is as follows:
Selected ratios relating to the allowance for loan losses follows:
Deposits
Bancorp's core deposits consist of non-interest and interest-bearing demand deposits, savings deposits, certificates of deposit under $100,000, certain certificates of deposit over $100,000 and IRAs. These deposits, along with other borrowed funds are used by Bancorp to support its asset base. By adjusting rates offered to depositors, Bancorp is able to influence the amounts of deposits needed to meet its funding requirements. The average amount of deposits in the Bank and average rates paid on such deposits for the years indicated are summarized as follows:
Maturities of time deposits of $100,000 or more outstanding at December 31, 2000, are summarized as follows:
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Short-Term Borrowings
Repurchase agreements have maturities of less than one month. Information regarding securities sold under agreements to repurchase follows:
Liquidity
The role of liquidity management is to ensure funds are available to meet depositors' withdrawal and borrowers' credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet the demand is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by the Bank, management prefers to focus on transaction accounts and full service relationships with customers. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than the market rate.
The Bank has a number of sources of funds to meet liquidity needs on a daily basis. The deposit base, consisting of consumer and commercial deposits and large dollar denomination ($100,000 and over) certificates of deposit, is a source of funds. The majority of these deposits are from long-term customers and are a stable source of funds. The Bank has no brokered deposits, and has an insignificant amount of deposits on which the rate paid exceeded the market rate by more than 50 basis points when the account was established. In addition, federal funds purchased continue to provide an available source of liquidity, although this source is seldom needed by the Bank.
Other sources of funds available to meet daily needs include the sales of securities under agreements to repurchase and funds made available under a treasury tax and loan note agreement with the Federal government. Also, the Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. At December 31, 2000 the amount of available credit from the FHLB totaled $125 million. To date, the Bank has not needed to access this source of funds. Finally, the Bank has federal funds purchased lines with correspondent banks totaling $60 million and Bancorp has a $6 million line of credit with a correspondent bank.
Bancorp's liquidity depends primarily on the dividends paid to it as the sole shareholder of the Bank. As discussed in Note 14 to Bancorp's consolidated financial statements, the Bank may pay up to $16,583,000 in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.
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Capital
Information pertaining to Bancorp's capital balances and ratios follows:
The increase in stockholders' equity from 1999 to 2000 was due to the strong earnings of 2000 coupled with a philosophy to retain approximately 70% to 80% of earnings in equity.
Bank holding companies and their subsidiary banks are required by regulators to meet risk based capital standards. These standards, or ratios, measure the relationship of capital to a combination of balance sheet and off balance sheet risks. The value of both balance sheet and off balance sheet items are adjusted to reflect credit risks.
Note 18 to the consolidated financial statements provides more details of regulatory capital requirements, as well as, capital ratios of the Bank. Bancorp and the Bank exceed regulatory capital ratios required to be well capitalized. These ratios for Bancorp and the Bank had decreased over the last several years as assets grew more quickly than equity. Management considers the effects of growth on capital ratios as it contemplates plans for expansion. In their December, 2000 examination, the Bank's regulators asked that certain mortgage loans sold be included in off balance sheet items considered in the computation of regulatory capital ratios. Investors may require the Bank to repurchase these loans if the obligor defaults in a time frame of up to one year from origination. While the Bank has repurchased one such loan in the eight years it has sold mortgage loans, the regulators felt it prudent to reflect these loans as described above. Had these loans not been included as described, Tier 1 and total risk-based capital would have been 9.10% and 10.40%, respectively at December 31, 2000.
In January, 1999 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 February, 1999. This capital change was made to enhance shareholder value by increasing the number of shares of Bancorp's stock outstanding and to reduce the per share market price of the stock. Per share information has been restated to reflect the stock splits. In November, 1999 Bancorp announced a 200,000 share common stock buy back program representing approximately 3% of it's common stock. The repurchased shares may be used for, among other things, issuance of shares for the stock options or employee stock ownership or purchase plans. At December 31, 2000, 71,950 shares had been repurchased pursuant to this program.
A component of equity is accumulated other comprehensive income (losses) which for Bancorp consists of net unrealized gains or losses on securities available for sale and a minimum pension liability, both net of taxes. Accumulated other comprehensive income was $21,000 at December 31, 2000 and accumulated other comprehensive loss was $1,351,000 at December 31, 1999. The $1,372,000 increase in accumulated other comprehensive income (losses) is primarily a reflection of the effect of the interest rate environment on the valuation of the Bank's portfolio of securities available for sale.
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The following table presents various key financial ratios:
Return on Assets and Equity
Recently Issued Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for derivative instruments. Under this standard, entities are required to carry all derivative instruments on the balance sheet at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.
During 1999 the Financial Account Standards Board issued Statement No. 137 "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133," which delays the effective date of Statement 133 until January 1, 2001; however, early adoption is permitted. During June of 2000, the Financial Accounting Standards Board issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" which provides guidance with respect to certain implementation issues related to Statement No. 133. On adoption, the provisions of Statement 133 must be applied prospectively. Bancorp will adopt Statement No. 133 on January 1, 2001. Because Bancorp currently has no derivative instruments or hedging activities, management believes the effect of adoption will not have an impact on the consolidated financial statements. Any derivative instruments acquired or hedging activities entered into will be recorded in the financial statements as required by Statement Nos. 133 and 138.
In September, 2000, the Financial Accounting Standards Board issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" which replaces FASB Statement No. 125. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The standards are based on the consistent application of the financial and servicing assets it controls and the liabilities it has incurred and derecognizes financial liabilities when extinguished.
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This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000.
A transfer of financial assets in which the transferor surrenders control is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. This statement requires that liabilities and derivatives transferred be initially measured at fair value, if practicable. Servicing assets and other retained interests in the transferred assets and retained interest sold, if any, should be allocated based on their relative fair values at the date of the transfer.
This statement requires the servicing assets and liabilities be subsequently measured by amortization in proportion to and over the period of estimated net servicing income or loss and an assessment for asset impairment or increased obligation be made based on their fair values. This statement also requires that a liability be derecognized if the debtor pays the creditor and is relieved of its obligation for the liability or the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor.
As Bancorp currently has no servicing assets, management believes the effect of the adoption will not have an impact on the consolidated financial statements.
Quarterly Operating Results
Following is a summary of quarterly operating results for 2000 and 1999:
Per share information has been adjusted to reflect the February, 1999 2-for-1 stock split.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Information required by this item is included in item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 7 through 9 of this Form 10-K.
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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, 2000 and 1999Consolidated Statements of Income—years ended December 31, 2000, 1999, and 1998Consolidated Statements of Changes in Stockholders' Equity—years ended December 31, 2000, 1999, and 1998Consolidated Statements of Comprehensive Income—years ended December 31, 2000, 1999, and 1998Consolidated Statements of Cash Flows—years ended December 31, 2000, 1999, and 1998Notes to Consolidated Financial StatementsIndependent Auditors' ReportManagement's Report on Consolidated Financial Statements
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Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Income
25
Consolidated Statements of Changes in Stockholders' Equity
26
Consolidated Statements of Comprehensive Income
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation and Nature of Operations
The consolidated financial statements include the accounts of S.Y. Bancorp, Inc. (Bancorp) and its wholly-owned subsidiary, Stock Yards Bank & Trust Company. Significant intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the 2000 presentation.
The Bank is engaged in commercial and retail banking services, trust and investment management services, and mortgage banking services. Bancorp's market area is Louisville, Kentucky and surrounding communities including southern Indiana.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenues and expenses during the reporting period. Actual results could differ from those estimates.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks.
Securities which are intended to be held until maturity are carried at amortized cost. Securities available for sale include securities which may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and prepayment risk changes. Securities available for sale are carried at fair value with unrealized gains or losses, net of tax effect, included in stockholders' equity. Amortization of premiums and accretion of discounts are recorded using the interest method. Gains or losses on sales of securities are computed on a specific identification cost basis.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or market value. Gains on sales of mortgage loans are recorded at the time of funding by an investor at the difference between the sales proceeds and the loan's carrying value.
Loans
Loans are stated at the unpaid principal balance less deferred loan fees. Interest income on loans is recorded on the accrual basis except for those loans in a nonaccrual income status. Loans are placed in a nonaccrual income status when the prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more unless such a loan is well secured and in the process of collection. Interest received on nonaccrual loans is generally applied to principal. Nonaccrual loans are returned to accrual status once principal recovery is reasonably assured.
Loans are classified as impaired when it is probable the Bank will be unable to collect interest and principal according to the terms of the loan agreement. These loans are measured based on the present
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value of future cash flows discounted at the loans' effective interest rate or at the fair value of the loans' collateral, if applicable. Generally, impaired loans do not accrue interest.
The allowance for loan losses is maintained at a level that adequately provides for losses inherent in the loan portfolio. Management determines the adequacy of the allowance based on reviews of individual credits, recent loss experience, current economic conditions, the risk characteristics of the various loan categories and such other factors that, in management's judgement, deserve current recognition in estimating loan losses. The allowance for loan losses is increased by the provision for loan losses and reduced by net loan charge-offs.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of premises and equipment is computed using both accelerated and straight-line methods over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the terms of the related leases or over the useful lives of the improvements, whichever is shorter.
Other Assets
Goodwill is being amortized over 15 years on a straight-line basis. Bancorp assesses the recoverability of goodwill by determining whether the carrying value of the asset can be realized over its remaining life. Undiscounted future operating cash flows of the acquired business are considered. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting Bancorp's average cost of funds.
Other real estate is carried at the lower of cost or fair value minus estimated selling costs. Any write downs to fair value at the date of acquisition are charged to the allowance for loan losses. Expenses incurred in maintaining assets, write downs to reflect subsequent declines in value and realized gains or losses are reflected in operations.
Bancorp accounts for income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for temporary differences between the financial reporting and the tax bases of Bancorp's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized on the statement of income in the period that includes the enactment date.
Net Income Per Share
Basic net income per common share is determined by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is determined by dividing net income by the weighted average number of shares of common stock outstanding plus the weighted average number of shares that would be issued upon exercise of dilutive options assuming proceeds are used to repurchase shares pursuant to the treasury stock method.
In June, 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for
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derivative instruments. Under this standard, entities are required to carry all derivative instruments in the balance sheet at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. Accounting for foreign currency hedges is similar to the accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.
During 1999, the Financial Accounting Standards Board issued Statement No. 137 "Accounting for Derivative Instruments and Heging Activities—Deferral of the Effective Date of FASB Statement No. 133," which delays the effective date of Statement 133 until January 1, 2001; however, early adoption is permitted. During June of 2000, the Financial Accounting Standards Boad issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" which provides guidance with respect to certain implementation issues related to Statement No. 133. On adoption, the provisions of Statement 133 must be applied prospectively. Bancorp will adopt Statement No. 133 on January 1, 2001. Because Bancorp currently has no derivative instruments or hedging activities, management believes the effect of adoption will not have an impact on the consolidated financial statements. Any derivative instruments acquired or hedging activities entered into will be recorded in the financial statements as required by Statement Nos. 133 and 138.
This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occuring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000.
A transfer of financial assets in which the transferor surrenders control is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. This statement requires that liabilities and derivatives transferred be initially measured at fair value, if practicable. Servicing assets and other retained interest in the transferred assets and retained interest sold, if any, based on their relative fair values are the date of the transfer.
This statement requires the servicing assets and liabilities be subsequently measured by amortization in proportion to and over the period of estimated net servicing income or loss and assessment for asset impairment or increased obligation based on their fair values. This statement also requires that a liability be derecognized if the debtor pays the creditor and is relieved of its obligation for the liability or the debtor is legally released from being the primary obligor under the liability either judicially or by the creditor.
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(2) Restrictions on Cash and Due from Banks
The Bank is required to maintain an average reserve balance in cash or with the Federal Reserve Bank relating to customer deposits. At December 31, 2000, the amount of those required reserve balances was approximately $6,055,000.
(3) Securities
The amortized cost and approximate fair value of securities available for sale follow:
The amortized cost and approximate fair value of securities held to maturity follow:
A summary of debt securities as of December 31, 2000 based on maturity is presented below. Actual maturities may differ from contractual maturities because issuers may have the right to call or
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prepay obligations. For mortgage-backed securities, the expected remaining life is reflected rather than contractual maturities.
Securities with a carrying value of approximately $63,264,000 at December 31, 2000 and $72,934,000 at December 31, 1999 were pledged to secure public deposits and certain borrowings.
(4) Loans
The composition of loans follows:
The Bank's credit exposure is diversified with secured and unsecured loans to individuals, small businesses and corporations. No specific industry concentration exceeds 10% of loans. While the Bank has a diversified loan portfolio, a customer's ability to honor contracts is dependent upon the economic stability and geographic region and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within the Bank's market area which encompasses Louisville, Kentucky and surrounding communities including southern Indiana.
Information about impaired loans follows:
Interest income on impaired loans (cash basis) was $32,000, $0, and $93,000 in 2000, 1999, and 1998 respectively.
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Loans to directors and their associates, including loans to companies for which directors are principal owners, and executive officers amounted to approximately $3,634,000 and $6,498,000 at December 31, 2000 and 1999, respectively. These loans were made on substantially the same terms, and interest rates and collateral, as those prevailing at the same time for other customers. During 2000 new loans of $14,658,000 were made to officers and directors and affiliated companies, repayments amounted to $17,921,000 and charges involving directors and executive officers involved a increase of $399,000.
An analysis of the changes in the allowance for loan losses for the years ended December 31, 2000, 1999, and 1998 follows:
(5) Premises and Equipment
A summary of premises and equipment follows:
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(6) Income Taxes
Income taxes consist of the following:
An analysis of the difference between the statutory and effective tax rates follows:
The effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
No valuation allowance for deferred tax assets was recorded as of December 31, 2000 and 1999 because Bancorp has sufficient prior taxable income to allow for utilization of the deductible temporary differences within the carryback period.
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(7) Deposits
The composition of interest bearing deposits follows:
Interest expense related to certificates of deposit and other time deposits in denominations of $100,000 or more was $5,348,000, $3,737,000, and $3,801,000, respectively, for the years ended December 31, 2000, 1999, and 1998.
At December 31, 2000, the scheduled maturities of time deposits were as follows:
(8) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Information concerning securities sold under agreements to repurchase is summarized as follows:
(9) Long-term Debt
Bancorp has a $6,000,000 line of credit with a correspondent bank. The balance outstanding at December 31, 2000 and 1999 was $1,800,000. The interest rate on the line was 7.999% at December 31, 2000 and is indexed to LIBOR with payments due quarterly. The terms of the note include a number of financial and general covenants, including capital and return on asset requirements as well as restrictions on additional long term debt, future mergers and significant dispositions without the consent of the lender. The note is renewable on an annual basis.
The Bank also has subordinated debentures outstanding amounting to $300,000 at both December 31, 2000 and 1999 which are due in October 2049. Interest 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
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2000, the rate was 7.50%.) 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.
(10) Net Income per Share and Common Stock Dividends
The following table reflects the numerators (net income) and denominators (average shares outstanding) for the basic and diluted net income per share computations:
In January, 1999 the Board of Directors declared a 2-for-1 stock split to be effected in the form of a 100% stock dividend. All share and per share information presented herein reflects any stock splits.
(11) Advances from the Federal Home Loan Bank
The Bank has an agreement with the Federal Home Loan Bank of Cincinnati (FHLB) which enables the Bank to borrow under terms to be established at the time of the advance. Advances from the FHLB would be collateralized by certain first mortgage loans under a blanket mortgage collateral agreement and FHLB stock. The Bank has not taken any advances under this agreement.
(12) Employee Benefit Plans
The Bank has the following defined contribution plans: employee stock ownership plan, money purchase plan and deferred income (401(k)) profit sharing plan. The plans are available to all employees meeting certain eligibility requirements. Expenses of the plans for 2000, 1999, and 1998 were $1,904,000, $904,000, and $847,000, respectively. Contributions are made in accordance with the terms of the plans. As of December 31, 2000 and 1999, the employee stock ownership plan held 82,723 and 81,701, respectively, shares of Company stock.
The Bank also sponsors an unfunded, non-qualified, defined benefit retirement plan for certain key officers. At December 31, 2000 and 1999 the accumulated benefit obligations for the plan were $1,573,000, and $1,402,000, respectively. A discount rate of 7.00% in 2000 and 7.50% in 1999 were used in determining the actuarial present value of the projected benefit obligation. Expenses of the plan were $132,000 in 2000, $142,000 in 1999, and $132,000 in 1998.
Obligations for other post-retirement and post-employment benefits are not significant.
(13) Stock Options
In 1999 shareholders approved an amendment to the 1995 stock incentive plan to reserve an additional 400,000 shares of common stock for issuance of stock options to Bank employees and non-employee directors. As of December 31, 2000, 241,800 shares were available for future grant. The
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320,000 shares of common stock reserved in 1995 under the plan have all been granted. Bancorp also has an older stock option plan under which all options have been granted. Options granted which do not vest immediately are subject to a vesting schedule of 20% per year. The options granted at an exercise price of $.861 per share were granted below market value of the Company's common stock at the grant date and do not expire. All other options were granted at an exercise price equal to the market value of common stock at the time of grant and expire ten years after the grant date.
Activity with respect to outstanding options follows:
The weighted average fair values of options granted in 2000, 1999 and 1998 were $5.70, $6.23 and $5.70, respectively.
Options outstanding at December 31, 2000 were as follows:
Bancorp applies the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock options granted at the market value of common
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stock at the time of grant. In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", Bancorp's proforma net income and income per share would have been as follows:
The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option pricing model. Assumptions used for grants were dividend yields of 1.54%, 1.53%, and 1.51%; expected volatility of 16.33%, 16.53%, and 16.68% and expected lives of 7 years. Risk free interest rates were 6.60% for the January 2000 grant and 5.04% for the December 2000 grant, and 5.15%, and 5.75%, for 1999 and 1998 respectively.
(14) Dividend Restriction
Bancorp's principal source of funds is dividends received from the Bank. Under applicable banking laws, bank regulatory authorities must approve the declaration of dividends in any year if such dividends are in an amount in excess of the sum of net income of that year and retained earnings of the preceding two years. At January 1, 2001, the retained earnings of the Bank available for payment of dividends without regulatory approval were approximately $16,583,000.
(15) Commitments and Contingent Liabilities
As of December 31, 2000, the Bank had various commitments and contingent liabilities outstanding which 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 $96,684,000, including standby letters of credit of $11,004,000, represent normal banking transactions, and no significant losses are anticipated to result therefrom. The Bank'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. The Bank uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet 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. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank 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 the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements.
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The Bank leases certain facilities, improvements and equipment under non-cancelable operating leases. Future minimum lease commitments for these leases are $680,000 in 2001, $676,000 in 2002, $589,000 in 2003, $437,000 in 2004, $428,000 in 2005 and $2,009,000 in the aggregate thereafter. Rent expense, net of sublease income, was $655,000 in 2000, $623,000 in 1999, and $429,000 in 1998.
Also, as of December 31, 2000, there were various pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or results of operations of Bancorp.
(16) Interest Rate Contracts
Bancorp uses interest rate collars to hedge its interest rate risk on variable rate loans. Under these agreements, Bancorp is the payer when the average prime rate exceeds cap strike rates and the counterparty is the payer when the prime rate declines below floor strike rates as set forth in the agreements. The notional amount of the interest rate collars represents an agreed upon amount on which the calculation of interest payments is based, and is significantly greater than the amount at risk. Although Bancorp is exposed to credit risk in the event of nonperformance by the counterparties to the agreements, this risk is minimized by dealing with counterparties having high credit ratings. The cost of replacing contracts in an unrealized gain position represents the measure of credit risk.
Net receipts or payments under the collars are recognized as adjustments to interest income on loans. The collars had an inmaterial effect on Bancorp's results of operations during 2000 and 1999.
One contract was outstanding during 2000, but expired in July 2000.
(17) Fair Value of Financial Instruments
The estimated fair values of financial instruments at December 31 are as follows:
Management used the following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value.
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Cash, Short-Term Investments and Short-Term Borrowings
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
For securities, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or dealer quotes.
The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-rate certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
Long-term Debt
Rates currently available to Bancorp for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit and Standby Letters of Credit
The fair values of commitments to extend credit are estimated using fees currently charged to enter into similar agreements and the creditworthiness of the customers. The fair values of standby letters of credit are based on fees currently charged for similar agreements or the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
Interest Rate Collars
The fair value of interest rate contracts are the estimated amount, based on market quotes, that Bancorp would receive to terminate the agreement at the reporting date, considering interest rates and the remaining term of the agreement.
Limitations
The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of Bancorp's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(18) Regulatory Matters
Bancorp and the Bank are subject to various capital requirements prescribed by banking regulations and administered by federal banking agencies. Under these requirements, Bancorp and the Bank must meet minimum amounts and percentages of Tier 1 and total capital, as defined, to risk
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weighted assets and Tier 1 capital to average assets. Risk weighted assets are determined by applying certain risk weightings prescribed by the regulations to various categories of assets and off balance sheet commitments. Capital and risk weighted assets may be further subject to qualitative judgements by regulators as to components, risk weighting and other factors. Failure to meet the capital requirements can result in certain mandatory, and possibly discretionary, corrective actions prescribed by the regulations or determined to be necessary by the regulators, which could materially affect the consolidated financial statements. Management believes Bancorp and the Bank meet all capital requirements to which it is subject as of December 31, 2000.
In their December, 2000 examination, the Bank's regulators asked that certain mortgage loans sold be included in off balance sheet items considered in the computation of regulatory capital ratios. Investors may require the Bank to repurchase these loans if the obligor defaults in a time frame of up to one year from origination. While the Bank has repurchased one such loan in the eight years it has sold mortgage loans, the regulators felt it prudent to reflect these loans as described above. Had these loans not been included as described, Tier 1 and total risk-based capital would have been 9.10% and 10.40%, respectively at December 31, 2000.
As of December 2000 and 1999, the most recent notifications from the Bank's primary regulator categorized the Bank as well capitalized under the regulatory framework. To be categorized as well capitalized, the Bank must maintain a total risk-based capital ratio of at least 10%; a Tier 1 ratio of at least 6%; and a leverage ratio of at least 5%. There are no conditions or events since those notifications that management believes have changed the institution's categories.
A summary of Bancorp's and the Bank's capital ratios at December 31, 2000 and 1999 follows:
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(19) S.Y. Bancorp, Inc. (parent company only)
Condensed Balance Sheets
Condensed Statements of Income
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Condensed Statements of Cash Flows
(20) 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, to the secondary market.
The financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Allocations have been consistently applied for all periods presented. 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.
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Selected financial information by business segment follows:
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Independent Auditors' Report
To the Board of Directors and StockholdersS.Y. Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of S.Y. Bancorp, Inc. (Bancorp) and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of Bancorp's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of S.Y. Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Louisville, KentuckyJanuary 18, 2001
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Management's Report on Consolidated Financial Statements
The accompanying consolidated financial statements and other financial data were prepared by the management of S.Y. Bancorp, Inc. (Bancorp), which has the responsibility for the integrity of the information presented. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts that are the best estimates and judgments of management with consideration given to materiality.
Management is further responsible for maintaining a system of internal controls designed to provide reasonable assurance that the books and records reflect the transactions of Bancorp and that its established policies and procedures are carefully followed. Management believes that Bancorp's system, taken as a whole, provides reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to permit preparation of financial statements in conformity with accounting principles generally accepted in the United States of America and to maintain accountability for assets; access to assets is permitted only in accordance with management's general or specific authorization, and the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
Management also seeks to assure the objectivity and integrity of Bancorp's financial data by the careful selection and training of qualified personnel, an internal audit function and organizational arrangements that provide an appropriate division of responsibility.
Bancorp's independent auditors, KPMG LLP, have audited the consolidated financial statements. Their audit was conducted in accordance with accounting principles generally accepted in the United States of America, which provide for consideration of Bancorp's internal controls to the extent necessary to determine the nature, timing, and extent of their audit tests.
The Board of Directors pursues its oversight role for the consolidated financial statements through the Audit Committee. The Audit Committee meets periodically and privately with management, the internal auditor, and the independent auditors to review matters relating to financial reporting, the internal control systems, and the scope and results of audit efforts. The internal and independent auditors have unrestricted access to the Audit Committee, with and without the presence of management, to discuss accounting, auditing, and financial reporting matters. The Audit Committee also recommends the appointment of the independent auditors to the Board of Directors.
/s/ DAVID H. BROOKS
David H. BrooksChairman and Chief Executive Officer
/s/ DAVID P. HEINTZMAN
David P. HeintzmanPresident
/s/ NANCY B. DAVIS
Nancy B. DavisExecutive Vice Presidentand Chief Financial Officer
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the directors and executive officers of Bancorp is incorporated herein by reference to the discussion under the heading, "ELECTION OF DIRECTORS," on pages 4 through 7 and SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE on page 9 of Bancorp's Proxy Statement for the 2001 Annual Meeting of Shareholders and the section captioned EXECUTIVE OFFICERS OF THE REGISTRANT on page 5 of this Form 10-K.
Information regarding principal occupation of directors of Bancorp follows:
David H. Brooks—Chairman and Chief Executive Officer, S.Y. Bancorp, Inc. and Stock Yards Bank & Trust Company;James E. Carrico—Managing Director, Acordia of Kentucky;Jack M. Crowner—Owner, Jack Crowner & Associates;Charles R. Edinger, III—Vice President, J. Edinger & Son, Inc.;Carl T. Fischer, Jr.—Farmer and horse breeder;Stanley A. Gall, M.D.—Professor and Chair Emeritus, University of Louisville;David P. Heintzman—President, S.Y. Bancorp, Inc. and Stock Yards Bank & Trust Company;George R. Keller—Retired; private investor;Bruce P. Madison—Vice President and Treasurer, Plumbers Supply Company, Inc.;Jefferson T. McMahon—Retired; private investor;Henry A. Meyer—President, Henry Fruechtenicht Co., Inc., Vice Chairman, S.Y. Bancorp, Inc.;Norman Tasman—President, Tasman Industries and Hide Processing;Kathy C. Thompson—Executive Vice President, S.Y. Bancorp, Inc. and Stock Yards Bank & Trust Company.
Item 11. Executive Compensation
Information regarding the compensation of Bancorp's executive officers and directors is incorporated herein by reference to the discussion under the heading, "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" on pages 11 through 15 of Bancorp's Proxy Statement for the 2001 Annual Meeting of Shareholders.
Information appearing under the headings "REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION" on pages 10 and 11 and "Shareholder Return Performance Graph" in the section entitled "COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS" contained on page 16 in Bancorp's Proxy Statement for the 2000 Annual Meeting of Shareholders shall not be deemed to be incorporated by reference in this report, notwithstanding any general statement contained herein incorporating portions of such Proxy Statement by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to the discussion under the headings, "ELECTION OF DIRECTORS" on pages 4 through 7 and "PRINCIPAL HOLDERS OF BANCORP'S COMMON STOCK," on pages 3 and 4 of Bancorp's Proxy Statement for the 2001 Annual Meeting of Shareholders.
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Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the discussion under the heading, "TRANSACTIONS WITH MANAGEMENT AND OTHERS," on page 17 of Bancorp's Proxy Statement for the 2001 Annual Meeting of Shareholders.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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Copies of the foregoing Exhibits will be furnished to others upon request and payment of Bancorp's reasonable expenses in furnishing the exhibits.
The exhibits listed in response to Item 14(a) 3 are filed as a part of this report.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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