Stock Yards Bancorp - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended June 30, 2005

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  0-17262

S. Y. BANCORP, INC.

(Exact name of registrant as specified in its charter)

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 – 13,894,218

shares issued and outstanding at August 2, 2005

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 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.  The Trust is not consolidated in the financial statements of Bancorp.  See note 4 to the 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, 2004 included in S.Y. Bancorp, Inc.’s Annual Report on Form 10-K.

Interim results for the three and six month periods ended June 30, 2005 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.  Assumptions include many factors such as changes in borrowers’ financial condition which can change quickly or historical loss ratios related to certain loan portfolios which may or may not be indicative of future losses.  To the extent that management’s assumptions prove incorrect, the results from operations could be materially affected by a higher provision for loan losses.  The accounting policy related to the allowance for loan losses is applicable to the commercial and retail banking segment of Bancorp.

Additionally, management has identified the accounting policy related to accounting for income taxes as critical to the understanding of Bancorp’s results of operations and discussed this conclusion with the Audit Committee of the board of directors.  The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.  Judgment is required in assessing the future tax consequences of events that have been recognized in Bancorp’s financial statements or tax returns.  Fluctuations in the actual outcome of these future tax consequences, including the effects of IRS examinations and examinations by state agencies, could materially impact Bancorp’s financial position and its results from operations.

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 has continued 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.

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(2)           Allowance for Loan Losses

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

(3)           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 has borrowed $20,000,000 via two separate fixed rate, non-callable advances of $10,000,000.  The advances are due in February of 2006 and 2007, respectively, with a weighted average rate of 2.45%.  Interest payments are due monthly, with principal due at maturity.

(4)           Subordinated Debentures

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

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

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.

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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 June 30, 2005 and December 31, 2004 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 $150,000 at June 30, 2005 and $180,000 at December 31, 2004. 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 2005, the rate on these debentures was 4.25% and for 2004 the rate was 3.00%. 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.  Annual evaluations have resulted in no charges for impairment.  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.

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(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:

(7)           Commitments to Extend Credit

As of June 30, 2005, 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 financial statements. In management’s opinion, commitments to extend credit of $293,538,000, including standby letters of credit of $12,654,000, represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of June 30, 2005.  Commitments to extend credit were $274,039,000, including letters of credit of $13,774,000, as of December 31, 2004.  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 commitments and conditional guarantees as for on-balance sheet instruments.  At June 30, 2005, no amounts have been accrued in the financial statements related to these instruments.

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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. Commitments to extend credit are primarily made up of commercial lines of credit, construction and development loans and home equity credit lines.  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, income-producing commercial properties, residential properties and other real estate under development.

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 had been issued as of June 30, 2005.

(9)           Net Income Per Share

The following table reflects, for the three and six month periods ended June 30, 2005 and 2004, 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):

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(10)         Segments

The Bank’s, and thus Bancorp’s, principal activities include commercial and retail banking and investment management and trust.  Commercial and retail banking provides a full range of loan and deposit products to individual consumers and businesses.  Commercial and retail banking also includes the Bank’s mortgage banking and brokerage activity.  Investment management and trust provides wealth management services including estate administration, retirement plan management, and custodian or trustee services.

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.

Prior to June 30, 2005, results from the Bank’s brokerage department were included in investment management and trust.  In the current period and future periods, brokerage results will be included in the commercial and retail banking segment.  Brokerage services are primarily directed toward the Bank’s retail customers and the management structure of the brokerage department reports through the commercial and retail banking segment.  Prior periods presented have been amended to be consistent with this change.

Selected financial information by business segment for the quarter and six months ended June 30, 2005 and 2004 follows:

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

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management and trust services, gains on the sale of mortgage loans held for sale and brokerage revenues helped offset a decline in service charges on deposit accounts.  Growth in these areas of non-interest income helped offset growth in non-interest expenses which were up 11% in the first six months of 2005 compared to 2004 primarily driven by increases in employee salaries and benefits due to additions to staff and annual compensation increases.

Results in 2005 were also positively affected by a lower provision for loan losses as credit quality metrics used by management improved.  Net charge-offs were down 19% for the first six months of 2005 compared to 2004.  While non-performing loans were up 23% compared to the level one year ago, they fell 27% compared to the first quarter of 2005.  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.  Taking into consideration all relevant data, management considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at June 30, 2005.

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

(a)           Results Of Operation

Net income of $5,492,000 for the three months ended June 30, 2005 increased $913,000 or 20% from $4,579,000 for the comparable 2004 period.  Basic net income per share was $0.40 for the second quarter of 2005, an increase of 21% from the $0.33 for the same period in 2004.  Net income per share on a diluted basis was $0.39 for the second quarter of 2005 compared to $0.32 for the second quarter of 2004; a 22% increase.  Annualized return on average assets and annualized return on average stockholders’ equity were 1.74% and 18.45%, respectively, for the second quarter of 2005, compared to 1.63% and 17.11%, respectively, for the same period in 2004.

Net income of $10,269,000 for the six months ended June 30, 2005 increased $1,242,000 or 14% from $9,027,000 from the comparable 2004 period.  Basic net income per share was $0.74 for the first six months of 2005, an increase of 12% from the $0.66 for the same period in 2004.  Net income per share on a diluted basis was $0.73 for the first six months of 2005 compared to $0.64 for the first six months of 2004.  This represents a 14% increase.  Annualized return on average assets and annualized return on average stockholders’ equity were 1.66% and 17.44%, respectively, for the first six months of 2005, compared to 1.62% and 17.19%, respectively, for the same period in 2004.

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