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 two subsidiaries, Stock Yards Bank & Trust Company (“the Bank”) and S.Y. Bancorp Capital Trust I (“the Trust”). The Bank 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 the Bank. The Trust is a Delaware statutory business trust that is a 100%-owned finance subsidiary of Bancorp.
Stock Yards Bank & Trust Company
Stock Yards Bank & Trust Company is the only banking subsidiary of Bancorp and was originally chartered in 1904. The Bank is headquartered in Louisville, Kentucky and provides commercial and retail banking services in Louisville and southern Indiana through 17 full service banking offices (See “ITEM 2.
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 eight branch properties at December 31, 2002 (one of which is located on leased land). The Bank also leased eight branch facilities. Of the seventeen banking locations, fourteen are located in Louisville and three are located in nearby southern Indiana. Office space for the loan production office in Indianapolis, Indiana is leased. See Notes 5 and 16 to Bancorp’s consolidated financial statements for the year ended December 31, 2002, for additional information relating to amounts invested in premises, equipment and lease commitments.
Item 3.
Item 3. Legal Proceedings
See Note 16 to Bancorp’s consolidated financial statements for the year ended December 31, 2002, for information relating to legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
The following table lists the names and ages (as of December 31, 2002) of all current executive officers of Bancorp. Each executive officer is appointed by 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.
Part II
Item 5.
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 15 to the consolidated financial statements. Management believes that Bancorp will continue to generate adequate earnings to continue to pay dividends on a quarterly basis. On December 31, 2002, Bancorp had 1,071 shareholders of record.
Item 6.
Item 6. Selected Financial Data
Selected Consolidated Financial Data
Per share information has been adjusted to reflect stock splits.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to provide information as to the analysis of the consolidated financial condition and results of operations of S.Y. Bancorp, Inc. (Bancorp) and its wholly owned subsidiaries, Stock Yards Bank & Trust Company (the Bank) and S.Y. Bancorp Capital Trust I (the Trust). 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, 2002, the Bank had seventeen full service banking locations in Louisville and southern Indiana and one loan production office in Indianapolis, Indiana. The combined effect of added convenience with the Bank’s focus on flexible, attentive customer service has 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.
Forward-Looking Statements
This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although Bancorp believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions both generally and more specifically in the market in which Bancorp and its subsidiaries operate; competition for Bancorp’s customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations or financial condition of Bancorp’s customers; or 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.
Critical Accounting Policies
Bancorp has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, Bancorp makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.
We have identified the accounting policy related to the allowance for loan losses as critical to the understanding of Bancorp’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. The impact and any associated risks related to these policies on our business operations are discussed in the “Allowance for Loan Losses” section below.
The following 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 $15,650,000 or $2.25 per share on a diluted basis in 2002. This compares to $13,542,000 or $1.96 per share in 2001 and $11,592,000 or $1.70 per share in 2000. The increase in 2002 net income was attributable to growth in both net interest income and non-interest income that was partially offset by increased non-interest expenses. Earnings include a 16.1% in­crease in fully taxable equivalent net interest income and a 15.9% increase in non-interest income. All categories of non-interest income showed improvement when compared to the prior year. The mortgage department had a record year in terms of gross income and contributed significantly to the increase in non-interest income. The investment management and trust department also had an extremely good year, considering the challenging equity market environment during 2002. Non-interest expenses increased 16.4%. Non-interest expenses increased in all categories and are 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 interest bearing liabilities and by changes in interest rates. The discussion that follows is based on tax equivalent interest data.
Bancorp’s net interest margin and net interest spread were positively affected during the year by the relatively flat interest rate environment, as rates remained unchanged for a majority of the year. Although average rates earned on loans and investment securities decreased in 2002 as higher yielding assets matured, average rates on interest bearing liabilities decreased to a greater extent, resulting in an improved net interest spread. Management believes that any further rate cuts in 2003 could have a negative impact on both spread and margin, while an increase in rates could have a positive impact on net interest spread and margin.
Comparative information regarding net interest income follows:
bp = basis point = 1/100th of a percent
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 the Bank’s prime rate and reprice as the prime rate changes, unless they reach a contractual floor or ceiling.
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 considering 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.
Interest Rate Simulation Sensitivity Analysis
Bancorp uses an earnings simulation model to estimate and evaluate the impact of changing interest rates on earnings. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments, in a one year forecast. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The December 31, 2002 simulation analysis indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in interest rates would have a negative effect on net interest income. These estimates are summarized below.
To assist in achieving a desired level of interest rate sensitivity, management has in the past entered into derivative financial instruments that 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 derivative financial instruments at December 31, 2002.
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 2002 and 2001 was impacted by volume increases and the lower average interest rate environment. The tax equivalent adjustments are based on a 35% federal 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
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 provision for loan losses increased during the year in consideration of loans charged off, the increase in non-performing loans during the year and current economic conditions. See “Financial Condition-Nonperforming Loans and Assets” for further discussion of non-performing loans. See “Financial Condition-Summary of Loan Loss Experience” for further discussion of loans charged off during the year.
The Bank’s 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, 2002 is adequate to absorb losses inherent in the loan portfolio as of the financial statement date. See “Financial Condition-Allowance for Loan Losses” for more information on the allowance for loan losses.
Non-Interest Income and Non-Interest Expenses
The following table provides a comparison of the components of non-interest income and expenses for 2002, 2001 and 2000. The table shows the dollar and percentage change from 2001 to 2002 and from 2000 to 2001. Below the table is a discussion of significant changes and trends.
The largest component of non-interest income is the income from investment management and trust services. This area of the Bank continues to grow through attraction of new business and customer retention. At December 31, 2002 assets under management totaled $1.147 billion compared to $1.179 billion at December 31, 2001 and $1.056 billion as of December 31, 2000. Because assets under management are expressed in terms of fair value, declines in market value have more than offset growth in assets through the attraction of new business. Growth in the department’s assets consisted primarily of personal trust accounts.
Growth in service charges on deposit accounts is primarily due to increased account volumes and an overdraft service for retail customers. Promotion of retail accounts has presented opportunities for growth in deposit accounts and increased fee income. The Bank also introduced a new retail deposit account product line during 2001 that has been successful at attracting new accounts. 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 an overdraft or increasing an overdraft, the customer pays the standard overdraft charge.
Bankcard transaction revenue primarily represents income that Bancorp derives from customers’ use of debit cards. As the popularity of these cards has grown, so has related income. Additionally, there have been
increases in the number of transactions by existing cardholders as customers recognize the convenience that the cards offer.
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 the loans sold are locked with the buyer and investor, thus Bancorp bears no interest rate risk related to these loans. Interest rates on conventional mort­gage loans directly impact the volume of business transacted by the mortgage banking division. Record low mortgage rates in the third and fourth quarters of 2002 led to record volume for the year. Interest rates on mortgage loans fell to a thirty year low in the fourth quarter of 2002 and resulted in a large volume of refinancing activity.
A large contributor to the increase in non-interest income was an increase in brokerage fees. Brokerage fees were up significantly as a new brokerage team finished their first full year of operations with the Bank. This area has been able to post solid results, despite the poor performance of the equity markets.
Other non-interest income has increased for several reasons and primarily reflects the Bank’s growth. Contributing factors to the increase for 2002 include the continued growth of income related to internet banking and other income categories related to mortgage refinancing such as title insurance.
Salaries and benefits are the largest component of non-interest expenses. Increases in personnel expense rose in part from regular salary increases. Also, the Bank continues to add employees to support growth. At December 31, 2002, the Bank had 379 full-time equivalent employees compared to 347 at the same date in 2001 and 327 for 2000. There are no significant obligations for post-retirement or post-employment benefits.
Net occupancy expense has increased as the Bank has added banking centers. During 2001, the Bank opened two locations. The branches opened in 2001 had only a partial year impact in 2001 and a full year’s impact in 2002. At December 31, 2002 the Bank had seventeen banking center locations including the main office. There was also a loan production office added late in the year, but its rental expense did not add significantly to overall net occupancy expenses. Data processing expenses rose as 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. Furniture and fixtures expense has also increased with the addition of banking centers. State bank taxes, which are primarily based on average capital and deposit levels, increased in 2002 as capital and deposit levels increased for the year. The increase in average capital was affected by Bancorp’s issuance of trust-preferred securities and subsequent capital contribution to the Bank in June 2001. This transaction had a full year’s impact in 2002.
Other non-interest expenses have increased from numerous factors and reflect the Bank’s growth. Among the most significant costs that increased were marketing and advertising.
Income Taxes
A three year comparison of income tax expense and effective tax rate follows:
In the third quarter of 2001 Bancorp received a refund of prior years’ income taxes of $182,000. This refund lowered the effective tax rate 90 basis points for year ended December 31, 2001.
Financial Condition
Earning Assets and Interest Bearing Liabilities
Summary information with regard to Bancorp’s financial condition follows:
The Bank has experienced significant growth in earning assets over the last several years. Growth of average earning assets occurred primarily in the area of loans. From year end 2001 to year end 2002, average loans increased approximately 9.9%. More specifically, period end commercial and industrial loans increased 12.9% and period end real estate mortgage loans increased 14.7%. Securities also grew during 2002 in conjunction with the overall growth in the asset size of Bancorp.
The increase in average interest bearing liabilities from 2001 to 2002 occurred primarily in interest bearing demand deposits, money market deposits, and time deposits. The primary increase in interest bearing liabilities occurred during the third quarter of 2002, when the Bank moved customer funds in the Investment Management and Trust Department from external money market mutual funds to interest-bearing accounts at the Bank as allowed by a change in a Kentucky statute. The increase in interest bearing demand deposits during the year was largely a function of the poor performance of the equity markets and lower interest rates. As the stock market continued to perform poorly during 2002, many investors moved their funds into deposit accounts. Because of lower interest rates, depositors tended to favor demand and money market deposits versus time deposits. Average long-term debt also increased during 2002, as a result of Bancorp’s issuance of $20 million of trust preferred securities in June 2001. Net proceeds of $18.9 million were used to pay off existing long-term debt and to fund the continued growth of Bancorp. See Note 9 and Note 10 to the consolidated financial statements for more details on long-term debt and trust preferred securities, respectively.
Average Balances and Interest Rates - Taxable Equivalent Basis
Notes:
- Yields on municipal securities have been computed on a fully tax equivalent basis using the federal income tax rate of 35%.
- Average balances for loans include the principal balance of non-accrual loans.
- Loan interest income includes loan fees and is computed on a fully tax equivalent basis using the federal income tax rate of 35%.
- Loan fees included in interest income amounted to $1,275,000, $1,376,000 and $989,000 in 2002, 2001 and 2000, respectively.
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, 2002, are as follows:
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:
Real estate mortgage loans are comprised primarily of owner occupied commercial properties, investment commercial properties and residential properties.
The following tables detail the amounts of commercial and industrial loans, and construction and development loans at December 31, 2002, 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:
Non-performing loans as a percentage of total loans remained fairly flat compared to the prior year. Loan quality continues to be a focus of management’s attention as the economy continued to slump in 2002.
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 2002 totaled $110,000. Interest income that would have been recorded in 2002 if nonaccrual loans were on a current basis in accordance with their original terms was $669,000.
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. At December 31, 2002, these loans totaled approximately $2,122,000. These loans 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.
Allowance for Loan Losses
An allowance for loan losses has been established to provide for loans that 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 for loan losses 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 judgments 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 “Provision for Loan Losses” for further discussion of the allowance for loan losses.
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 increase in charge-offs during the year is primarily due to a continued weakness in the local community that the Bank serves. Most of the increase in charge-offs related to the commercial and industrial portfolio and was representative of the overall weakness in the local economy. Additionally, part of the increase in charge-offs related to the consumer portfolio and are a reflection of a tough economy and the Bank’s aggressive policy of charging off non-performing consumer loans. See “Provision for Loan Losses” for discussion of the provision for loan losses.
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.
The ratio of loans in each category to total outstanding loans is as follows:
Selected ratios relating to the allowance for loan losses follow:
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, 2002, are summarized as follows:
Short-Term Borrowings
Securities sold under agreements to repurchase represent short-term borrowings from commercial customers as part of a cash management service. Repurchase agreements generally have maturities of one to four days from the transaction date.
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 rates.
Bancorp’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for Bancorp’s liquidity position and profile. A combination of daily, weekly and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital and exposure to contingent draws on Bancorp’s liquidity.
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 come 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.
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, 2002, the
amount of available credit from the FHLB totaled $126 million. Bancorp’s ability to borrow from the FHLB was reduced in the past year, as the Bank used some of its credit line for a standby letter of credit to secure trust deposits. Additionally, the Bank has federal funds purchased lines with correspondent banks totaling $58 million. As a member, Bancorp can also borrow from the Federal Reserve Bank of Saint Louis based upon its asset size. Bancorp has in the past had a line of credit with a correspondent bank and management believes it has the ability to restore a line of credit with an outside bank at any time.
Bancorp’s liquidity depends primarily on the dividends paid to it as the sole shareholder of the Bank. As discussed in Note 15 to Bancorp’s consolidated financial statements, the Bank may pay up to $29,125,000 in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.
Over the normal course of business, Bancorp enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through Bancorp’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of Bancorp’s liquidity.
Other Off-Balance Sheet Activities
In the normal course of business, Bancorp is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in Bancorp’s consolidated financial statements. Such activities include: traditional off-balance sheet credit-related financial instruments, commitments under operating leases and long-term debt.
Bancorp provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2002 are as follows:
Since many of the unused commitments are expected to expire or be only partially used, the total amount of commitments in the preceding table does not necessarily represent future cash requirements.
In addition to owned banking facilities, the Bank has entered into long-term leasing arrangements to support the ongoing activities of Bancorp. The required payments under such commitments and long-term debt at December 31, 2002 are as follows:
Capital
Information pertaining to Bancorp’s capital balances and ratios follows:
The increase in stockholders’ equity from 2002 to 2001 was due to the strong earnings of 2002 coupled with a philosophy to retain approximately 75% 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. In 2001, Bancorp issued $20 million of trust preferred securities which qualify as regulatory capital under Federal Reserve guidelines and significantly improved Bancorp’s and the Bank’s capital ratios. See Note 10 to the consolidated financial statements for more details on the trust preferred securities. Management considers the effects of growth on capital ratios as it contemplates plans for expansion.
In November 1999, Bancorp announced a 200,000 share common stock buy back pro­gram representing approximately 3% of its 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, 2002, shares repurchased pursuant to this program totaled 111,071.
A component of equity is accumulated other comprehensive income 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 $2,239,000 and $645,000 at December 31, 2002 and 2001, respectively. The $1,594,000 increase in accumulated other comprehensive income 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.
The following table presents various key financial ratios:
Recently Issued Accounting Pronouncements
Effective January 1, 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other 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 in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Bancorp ceased the amortization of goodwill effective January 1, 2002 with the adoption of SFAS No. 142. At that date unamortized goodwill was $682,000.
Effective January 1, 2002, Bancorp adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, FASB has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. The adoption of SFAS No. 144 did not have an effect on the consolidated financial statements of Bancorp.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years beginning and transactions occurring after May 15, 2002, respectively. All other provisions of this Statement are effective for financial statements issued on or after May 15, 2002. The adoption of this Statement will not have a material effect on Bancorp’s consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement requires that a liability for costs associated with an exit or disposal activity to be recognized when incurred rather than at the date commitment to an exit or disposal plan. This Statement replaces Emerging Issues Task Force 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this Statement will not have a material effect on Bancorp’s consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.” This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of SFAS No. 141, “Business Combinations.” SFAS No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with SFAS No. 141 and the related intangibles accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72, “Accounting or Certain Acquisitions of Banking or Thrift Institutions,” which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved “troubled” institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. SFAS No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of SFAS No. 72. The adoption of this Statement did not have a material effect on the Bancorp’s consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 expands disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 applies to most types of guarantees except for, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, and guarantees of a company’s own future performance. Historically, the guarantor has not recorded guarantees until it was probable that a payment would be required under the guarantee. The new accounting requirements now require a guarantor to record a liability at its fair value at the time the guarantee is made. Certain guarantees are subject to the disclosure requirements of FIN 45, but not to its recognition provisions. These guarantees include, but are not limited to, guarantees treated as derivatives under SFAS No. 133, guarantees that are considered contingent consideration in a business combination, and guarantees issued between parent corporations and their subsidiaries or between entities under common
control. The new disclosure requirements require a guarantor to disclose the following about each guarantee: the overall details of the guarantee, the maximum, potential amount of future payments that could be required, the carrying amount of the guarantor’s obligation under the guarantee, the fair value of the liability included in the statement of financial position, and the nature and extent of recourse provisions and collateral related to the guarantee and the extent of any potential amounts that the guarantor may, recover from third parties as a result of payments made under the guarantee. The new accounting requirements are to be applied prospectively to any guarantees issued or modified after December 31, 2002. The new disclosure requirements are applicable to all guarantees covered by this Interpretation, no matter when issued, and are effective for interim or annual financial statements for periods ending after December 15, 2002. Additional information related to Bancorp’s significant guarantees are disclosed in Footnote 16 in the notes to Bancorp’s 2002 audited consolidated financial statements. The adoption of this FIN 45 did not have a material effect on Bancorp’s consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 requires more frequent and prominent disclosures in the financial statements about the effects of stock-based compensation. It also provides alternative methods for voluntary transition to the expense recognition method of accounting for stock options. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002 and are included in Footnote 1 in the notes to Bancorp’s 2002 audited consolidated financial statements. The adoption of this Statement did not have an effect on Bancorp’s consolidated financial statements.
Quarterly Operating Results
Following is a summary of quarterly operating results for 2002 and 2001:
Item 7a.
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” of this Form 10-K.
Item 8.
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, 2002 and 2001
Consolidated Statements of Income - years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders’ Equity - years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income - years ended December 31, 2002, 2001 and
Consolidated Statements of Cash Flows - years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Independent Auditors’ Report
Management’s Report on Consolidated Financial Statements
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
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 subsidiaries, Stock Yards Bank & Trust Company (the Bank) and S.Y. Bancorp Capital Trust I (the Trust). Significant intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the 2002 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.
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and display of comprehensive income and its components. Comprehensive Income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For Bancorp, this includes net income, net unrealized gains and losses on available for sale investment securities and minimum pension liability adjustments. This statement requires only additional disclosures in the consolidated financial statements; it does not affect Bancorp’s financial position or results of operations.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks.
Securities
Securities intended to be held until maturity are carried at amortized cost. Securities available for sale include securities that 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 for securities. For securities for which impairment is other than temporary, losses are reflected in operations.
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 disbursement 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 value of future cash flows discounted at the loans’ effective interest rate or at the estimated fair value of the loans’ collateral, if applicable. Generally, impaired loans do not accrue interest.
Allowance for Loan Losses
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 judgment, 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
Bancorp ceased the amortization of goodwill effective January 1, 2002. The amount of goodwill impairment, if any, is measured and evaluated annually.
Other real estate is carried at the lower of cost or estimated 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.
Treasury Stock
The repurchase of Bancorp’s common stock is recorded at cost, and repurchased shares return to the status of authorized, but unissued.
Income Taxes
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 in 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.
Segment Information
The Bank provides a broad range of financial services to individuals, corporations and others through its seventeen banking locations in Louisville and southern Indiana. These services include lending, receiving deposits, providing cash management services, safe deposit box rental, mortgage lending and investment management and trust activities. The Bank’s chief decision makers monitor the results of the various banking products and services and accordingly, the Bank’s operations are considered by management to be aggregated in three reportable operating segments: commercial and retail banking, investment management and trust and mortgage banking.
Stock-Based Compensation
Bancorp measures compensation cost for stock-based compensation plans as the difference between the exercise price of the options granted and the fair market value of Bancorp’s stock at the grant date. Bancorp discloses proforma net income and earnings per share in the notes to its consolidated financial statements as if compensation was measured at the date of grant based on the fair value of the award and recognized over the service period.
As permitted by Statement of Financial Accounting Standards (SFAS) No. 148, Bancorp will continue to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock-Based Compensation,” for all employee 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. In addition, Bancorp is awaiting further guidance and clarity that may result from current Financial Accounting Standards Board and International Accounting Standards Board stock compensation projects and will continue to evaluate any developments concerning mandated, as opposed to optional, fair-value based expense recognition.
Bancorp’s as reported and proforma information for the years ended December 31 follow:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:
Recently Issued Accounting Pronouncements
Effective January 1, 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other 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 in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Bancorp ceased the amortization of goodwill effective January 1, 2002 with the adoption of SFAS No. 142. At that date unamortized goodwill was $682,000. Bancorp believes the impact of adopting SFAS No. 142 was immaterial to the consolidated financial statements, as goodwill and intangible amortization prior to adoption was approximately $70,000 per year.
Effective January 1, 2002, Bancorp adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, FASB has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. The adoption of SFAS No. 144 did not have an effect on the consolidated financial statements of Bancorp.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This Statement also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years beginning and transactions occurring after May 15, 2002, respectively. All other provisions of this Statement are effective for financial statements issued on or after May 15, 2002. The adoption of this Statement will not have a material effect on Bancorp’s consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement requires that a liability for costs associated with an exit or disposal activity to be recognized when incurred rather than at the date commitment to an exit or disposal plan. This Statement replaces Emerging Issues Task Force 94-3 and is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this Statement will not have a material effect on Bancorp’s consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.” This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of SFAS No. 141, “Business Combinations.” SFAS No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with SFAS No. 141 and the related intangibles accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72, “Accounting or Certain Acquisitions of Banking or Thrift Institutions,” which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved “troubled” institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. SFAS No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of SFAS No. 72. The adoption of this Statement did not have a material effect on the Bancorp’s consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 expands disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 applies to most types of guarantees except for, among others, guarantees relating to employee compensation, residual value guarantees under capital lease arrangements, commercial letters of credit, loan commitments, and guarantees of a company’s own future performance. Historically, the guarantor has not recorded guarantees until it was probable that a payment would be required under the guarantee. The new accounting requirements now require a guarantor to record a liability at its fair value at the time the guarantee is made. Certain guarantees are subject to the disclosure requirements of FIN 45, but not to its recognition provisions. These guarantees include, but are not limited to, guarantees treated as derivatives under SFAS No. 133, guarantees that are considered contingent consideration in a business combination, and guarantees issued between parent corporations and their subsidiaries or between entities under common control. The new disclosure requirements require a guarantor to disclose the following about each guarantee: the overall details of the guarantee, the maximum, potential amount of future payments that could be required, the carrying amount of the guarantor’s obligation under the guarantee, the fair value of the liability included in the statement of financial position, and the nature and extent of recourse provisions and collateral related to the guarantee and the extent of any potential amounts that the guarantor may, recover from third parties as a result of payments made under the guarantee. The new accounting requirements are to be applied prospectively to any guarantees issued or modified after December 31, 2002. The new disclosure requirements are applicable to all guarantees covered by this interpretation, no matter when issued, and are effective for interim or annual financial statements for periods ending after December 15, 2002. Additional information related to Bancorp’s significant guarantees are disclosed in Footnote 16 in the notes to Bancorp’s 2002 audited consolidated financial statements. The adoption of FIN 45 did not have a material effect on Bancorp’s consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 requires more frequent and prominent disclosures in the financial statements about the effects of stock-based compensation. It also provides alternative methods for voluntary transition to the expense recognition method of accounting for stock options. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain
circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002 and are included in this note to Bancorp’s 2002 audited consolidated financial statements. The adoption of this Statement did not have an effect on Bancorp’s consolidated financial statements.
(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, 2002, the amount of those required reserve balances was approximately $9,155,000.
(3) Securities
The amortized cost and approximate fair value of securities available for sale follow:
Other securities include Federal Home Loan Bank stock of $2,975,000 at December 31, 2002 and $2,540,000 at December 31, 2001. The balance of other securities at December 31, 2002 consists of trust preferred securities.
The amortized cost and approximate fair value of securities held to maturity follow:
A summary of debt securities as of December 31, 2002 based on maturity is presented below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. For mortgage-backed securities, the expected remaining life is reflected rather than the contractual maturities.
Securities with a carrying value of approximately $75,011,000 at December 31, 2002 and $63,963,000 at December 31, 2001 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 ten percent of loans. While the Bank has a diversified loan portfolio, a customer’s ability to honor contracts is somewhat 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 $110,000, $157,000 and $32,000 in 2002, 2001, and 2000, respectively. Interest income that would have been recorded if nonaccrual loans were on a current basis in accordance with their original terms was $669,000, $512,000 and $271,000 in 2002, 2001 and 2000, respectively.
Loans to directors and their associates, including loans to companies for which directors are principal owners, and executive officers amounted to approximately $4,952,000 and $4,994,000 at December 31, 2002 and 2001, 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 2002, new loans of $24,595,000 were made to officers and directors and affiliated companies and repayments amounted to $23,277,000. An additional $1,360,000 reduction in loans to directors was due to the resignation of a board member during the year.
An analysis of the changes in the allowance for loan losses for the years ended December 31, 2002, 2001, and 2000 follows:
(5) Premises and Equipment
A summary of premises and equipment follows:
Depreciation expense related to premises and equipment was $2,152,000 in 2002, $1,695,000 in 2001 and $1,601,000 in 2000.
(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, 2002 and 2001 because Bancorp has sufficient prior taxable income to allow for utilization of the deductible temporary differences within the carryback period.
(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 $4,712,000, $6,492,000 and $5,348,000, respectively, for the years ended December 31, 2002, 2001 and 2000.
At December 31, 2002, 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
The Bank has subordinated debentures outstanding amounting to $240,000 at December 31, 2002 and $270,000 at December 31, 2001. 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 2002, the rate on these debentures was 3.75%. 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.
Bancorp had a $6,000,000 line of credit with a correspondent bank in 2001. This line of credit was terminated in 2002, as Bancorp had no immediate need to borrow funds. The balance outstanding at December 31, 2001 was $0. The interest rate on the line was indexed to either LIBOR or the lending bank’s prime rate with payments due quarterly. The terms of the note included 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. Bancorp believes they could obtain borrowings under similar terms at any time without the expense of maintaining a line of credit.
(10) Long-term Debt - Trust Preferred Securities
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 (the Securities) which mature on June 30, 2031; however prior redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. Proceeds from issuance of the securities, net of underwriting fees and offering expenses were $18.9 million. The principal asset of the Trust is a $20.0 million subordinated debenture of Bancorp. The subordinated debenture also bears interest at the rate of 9.00% and matures June 30, 2031, subject to prior redemption under certain circumstances. Bancorp owns all 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, irrevocable and unconditional guarantee on a subordinated basis by Bancorp of the Trust’s obligation with respect to the Securities.
Subject to certain exceptions and limitations, Bancorp may, from time to time, defer subordinated debenture interest payments, which could 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.
(11) 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:
(12) Advances from the Federal Home Loan Bank
The Bank has an agreement with the Federal Home Loan Bank of Cincinnati (FHLB) that 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. The Bank also has a standby letter of credit from the FHLB for $25 million outstanding at December 31, 2002. Due to a change in Kentucky law, excess cash balances in Investment Management and Trust customer accounts, formerly invested in external mutual funds, may now be retained as deposits in the Bank. As a part of this transaction, Kentucky law requires these deposits above the $100,000 per account protection provided by the FDIC, to be backed by some form of collateral. The standby letter of credit from the FHLB collateralizes these accounts.
(13) Employee Benefit Plans
The Bank has an employee stock ownership plan, a 401(k) profit sharing plan and a non-qualified deferred compensation plan. All plans are defined contribution plans. Prior to March 2001, the Bank also had a money purchase plan. This plan was eliminated during 2001 and the assets of the plan were combined with the profit sharing plan. The plans are available to all employees meeting certain eligibility requirements. Expenses of the plans for 2002, 2001, and 2000 were $776,000, $824,000, and $1,094,000, respectively. Contributions are made in accordance with the terms of the plans. As of December 31, 2002 and 2001, the employee stock ownership plan held 91,414 and 89,489, respectively, shares of Company stock.
The Bank also sponsors an unfunded, non-qualified, defined benefit retirement plan for certain key officers. At December 31, 2002 and 2001 the accumulated benefit obligations for the plan were $1,804,000 and $1,769,000, respectively. A discount rate of 6.75% in 2002 and 2001 was used in determining the actuarial present value of the projected benefit obligation. Expenses of the plan were $171,000 in 2002, $242,000 in 2001 and $132,000 in 2000.
Obligations for other post-retirement and post-employment benefits are not significant.
(14) Stock Options
In 1995, shareholders approved a stock incentive plan. Under this plan there have been a total of 720,000 shares of common stock reserved for issuance of stock options to Bank employees and non-employee directors. As of December 31, 2002, 92,000 shares were available for future grant. 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 $0.861 per share were granted in 1984 below the market value of the Bank’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 2002, 2001 and 2000 were $10.47, $8.72 and $5.70, respectively.
Options outstanding at December 31, 2002 were as follows:
(15) 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, 2003, the retained earnings of the Bank available for payment of dividends without regulatory approval were approximately $29,125,000.
(16) Commitments and Contingent Liabilities
As of December 31, 2002, the Bank had various commitments and contingent liabilities outstanding that arose in the normal course of business, such as standby letters of credit and commitments to extend credit, which are properly not reflected in the consolidated financial statements. In management’s opinion, commitments to extend credit of $174,707,000, including standby letters of credit of $10,563,000, 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.
The Bank leases certain facilities, improvements and equipment under non-cancelable operating leases. Future minimum lease commitments for these leases are $802,000 in 2003; $869,000 in 2004; $870,000 in 2005; $823,000 in 2006; $802,000 in 2007 and $2,916,000 in the aggregate thereafter. Rent expense, net of sublease income, was $673,000 in 2002, $615,000 in 2001, and $655,000 in 2000.
Also, as of December 31, 2002, there were 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.
(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 to estimate the fair value of each class of financial instrument for which it is practicable to estimate the value.
Cash, Short-Term Investments, Accrued Interest Receivable/Payable and Short-Term Borrowings
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities
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.
Mortgage loans held for sale
The fair value of mortgage loans held for sale is determined by market quotes for each loan based on loan type, term and size.
Loans, net
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.
Deposits
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 deposits 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.
Limitations
The fair value estimates are made at a specific 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 I and total capital, as defined, to risk weighted assets and Tier I 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 judgments 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 met all capital requirements to which they were subject as of December 31, 2002.
As of December 2002 and 2001, 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 I ratio of at least 6%; and a leverage ratio of at least 5%. All banks are required to have a total capital ratio of at least 8%, a Tier I ratio of at least 4% and a leverage ratio of at least 3%. There are no conditions or events since those notifications that management believes have changed the Bank’s categories.
A summary of Bancorp’s and the Bank’s capital ratios at December 31, 2002 and 2001 follows:
(1) Ratio is computed in relation to risk-weighted assets.
(2) Ratio is computed in relation to average assets.
(19) S.Y. Bancorp, Inc. (parent company only)
Condensed Balance Sheets
Condensed Statements of Income
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. 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.
Principally, all of the net assets of S.Y. Bancorp, Inc. are involved in the commercial and retail banking segment.
Selected financial information by business segment follows:
Independent Auditors’ Report
To the Board of Directors and Stockholders
S.Y. Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of S.Y. Bancorp, Inc. (Bancorp) and subsidiaries as of December 31, 2002 and 2001, 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, 2002. 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 subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
Louisville, Kentucky
January 23, 2003
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 auditing standards 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 auditors, 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.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Part III
Item 10.
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, “ITEM 1. ELECTION OF DIRECTORS,” and SECTION 16(A) BENEFICIAL OWNERSHIP RE­PORTING COMPLIANCE in Bancorp’s Proxy Statement for the 2003 Annual Meeting of Shareholders and the section captioned EXECUTIVE OFFICERS OF THE REGISTRANT in 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 - Manging Director, Acordia of Kentucky;­
Jack M. Crowner - Cwner, 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 of Obstetrics and Gynecology, University of Louisville;
David P. Heintzman - President, S.Y. Bancorp, Inc. and Stock Yards Bank & Trust Company;
Bruce P. Madison - President and CEO, Plumbers Supply Company, Inc.;
Jefferson T. McMahon - Retired; private investor;
Nicholas X. Simon - President and CEO, Publishers Printing Company, LLC;
Norman Tasman - President, Tasman Industries and Tasman Hide Processing;
Kathy C. Thompson - Executive Vice President, S.Y. Bancorp, Inc. and Stock Yards Bank & Trust Company.
In accordance with Bancorp’s by-laws, Jack M. Crowner and Carl T. Fischer, Jr. will retire from the Board of Directors after the 2003 annual meeting.
Item 11.
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, “CORPORATE GOVERNANCE AND OTHER MATTERS - BOARD OF DIRECTORS’ MEETINGS, COMMITTEES AND FEES” in Bancorp’s Proxy Statement for the 2003 Annual Meeting of Shareholders.
Information appearing under the headings “REPORT ON EXECUTIVE COMPENSATION” and “Shareholder Return Performance Graph” in the section entitled “EXECUTIVE COMPENSATION AND OTHER INFORMATION” in Bancorp’s Proxy Statement for the 2003 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the discussion under the headings, “ITEM 1. ELECTION OF DIRECTORS” and “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,” in Bancorp’s Proxy Statement for the 2003 Annual Meeting of Shareholders.
The following table furnishes common shares authorized for issuance under equity compensation plans. Bancorp has currently only issued stock options as equity compensation. The 1995 Stock Incentive Plan does include stock appreciation rights; however, it does not contain provisions for stock warrants. For further information on stock options see footnote 14 in Form 10-K.
(1) These options were granted under the 1984 Stock Option Plan under which all options have been granted. The last grant under this plan occurred in 1994. Of the remaining outstanding options, 8,520 options were granted at a strike price below market value and do not expire. All others were granted at market value and expire in 2004.
Item 13.
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,” in Bancorp’s Proxy Statement for the 2003 Annual Meeting of Shareholders.
Item 14.
Item 14. Controls and Procedures
Bancorp maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission (SEC), and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on their evaluation of Bancorp’s disclosure controls and procedures which took place within 90 days prior to the filing date of this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that Bancorp is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.
Bancorp also maintains a system of internal controls designed to provide reasonable assurance that: transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary (1) to permit preparation of financial statements in conformity with generally accepted accounting principles in the United States of America, and (2) 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 existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
Since the date of the most recent evaluation of Bancorp’s disclosure controls and procedures by the Chief Executive and Chief Financial Officers, there have been no significant changes in Bancorp’s internal controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The following financial statements are included in this Form 10-K:
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Income - years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders’ Equity - years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income - years ended December 31, 2002, 2001 and
Consolidated Statements of Cash Flows - years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Independent Auditors’ Report
(a) 2. List of Financial Statement Schedules
Schedules to the consolidated financial statements of Bancorp are omitted since they are either not required under the related instructions, are inapplicable, or the required information is shown in the consolidated financial statements or notes thereto.
(a) 3. List of Exhibits
3.1
Articles of Incorporation of Bancorp filed with the Secretary of State of Kentucky on January 12, 1988. Exhibit 3.1 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
3.2
Articles of Amendment to the Articles of Incorporation of Bancorp filed with the Secretary of State of Kentucky on May 8, 1989. Exhibit 3.2 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
3.3
Articles of Amendment to the Articles of Incorporation of Bancorp filed with the Secretary of State of Kentucky on June 30, 1994. Exhibit 3.3 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
3.4
Articles of Amendment to the Articles of Incorporation of Bancorp filed with the Secretary of State of Kentucky on April 29, 1998. Exhibit 3.4 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
3.5
Bylaws of Bancorp, as amended, currently in effect. Exhibit 3.5 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.1*
S.Y. Bancorp, Inc. Stock Option Plan as amended. Exhibit 10.1 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.2*
Stock Yards Bank &Trust Company Senior Officers Security Plan adopted December 23, 1980. Exhibit 10.2 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.3*
Form of Indemnification agreement between Stock Yards Bank & Trust Company, S.Y. Bancorp, Inc. and each member of the Board of Directors. Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.4*
Senior Executive Severance Agreement executed in July, 1994 between Stock Yards Bank & Trust Company and David H. Brooks. Exhibit 10.4 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.5*
Senior Executive Severance Agreement executed in July, 1994 between Stock Yards Bank & Trust Company and David P. Heintzman. Exhibit 10.5 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.6*
Senior Executive Severance Agreement executed in July, 1994 between Stock Yards Bank & Trust Company and Kathy C. Thompson. Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.7*
S.Y. Bancorp, Inc. 1995 Stock Incentive Plan. Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.8*
Amendment Number One to the Senior Executive Severance Agreement executed in February, 1997 between Stock Yards Bank & Trust Company and David H. Brooks. Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.9*
Amendment Number One to the Senior Executive Severance Agreement executed in February, 1997 between Stock Yards Bank & Trust Company and David P. Heintzman. Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.10*
Amendment Number One to the Senior Executive Severance Agreement executed in February, 1997 between Stock Yards Bank & Trust Company and Kathy C. Thompson. Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.11*
Senior Executive Severance Agreement, as amended, executed in February, 1997 between Stock Yards Bank & Trust Company and Nancy B. Davis. Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.12*
S.Y. Bancorp, Inc. Amended and Restated 1995 Stock Incentive Plan. Exhibit 10.12 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
Subsidiaries of the Registrant.
Independent Auditors’ Consent.
* Indicates matters related to executive compensation.
Copies of the foregoing Exhibits will be furnished to others upon request and payment of Bancorp’s reasonable expenses in furnishing the exhibits.
(b)
Reports on Form 8-K
None
(c)
Exhibits
The exhibits listed in response to Item 14(a) 3 are filed as a part of this report.
(d)
Financial Statement Schedules
None
Where You Can Find More Information
Bancorp is subject to the informational requirements of the Securities and Exchange Act of 1934 and accordingly files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information on the Public Reference Room. Bancorp’s public filings are also maintained on the SEC’s Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that web site is http://www.sec.gov. In addition, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act may be accessed free of charge through our web site as soon as reasonably practicable after we have electronically filed such material with, or furnished it to, the SEC. The address of that web site is http://www.syb.com.
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.
/s/ David H. Brooks
Chairman and Chief Executive Officer and
March 18, 2003
David H. Brooks
Director (principal executive officer)
/s/ David P. Heintzman
President and Director
March 18, 2003
David P. Heintzman
/s/ Nancy B. Davis
Executive Vice President, Secretary, Treasurer
March 18, 2003
Nancy B. Davis
and Chief Financial Officer (principal financial
and accounting officer)
/s/ James E. Carrico
Director
March 18, 2003
James E. Carrico
/s/ Jack M. Crowner
Director
March 18, 2003
Jack M. Crowner
/s/ Charles R. Edinger, III
Director
March 18, 2003
Charles R. Edinger, III
/s/ Carl T. Fischer, Jr.
Director
March 18, 2003
Carl T. Fischer, Jr.
/s/ Stanley A. Gall
Director
March 18, 2003
Stanley A. Gall, M.D.
/s/ Bruce P. Madison
Director
March 18, 2003
Bruce P. Madison
/s/ Jefferson T. McMahon
Director
March 18, 2003
Jefferson T. McMahon
/s/ Nicholas X. Simon
Director
March 18, 2003
Nicholas X. Simon
/s/ Norman Tasman
Director
March 18, 2003
Norman Tasman
/s/ Kathy C. Thompson
Executive Vice President and Director
March 18, 2003
Kathy C. Thompson
CERTIFICATION
I, David H. Brooks, Chairman and Chief Executive Officer of S.Y. Bancorp, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of S.Y. Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
CERTIFICATION
I, David P. Heintzman, President of S.Y. Bancorp, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of S.Y. Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
CERTIFICATION
I, Nancy B. Davis, Executive Vice President, Treasurer and Chief Financial Officer of S.Y. Bancorp, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of S.Y. Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Annual report of S.Y. Bancorp, Inc. on Form 10-K for the period ending December 31, 2002 (the “Report”), we, the undersigned, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge and belief: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of S.Y. Bancorp, Inc. as of and for the periods presented in the Report.
Index to Exhibits
Exhibit Number
3.1
Articles of Incorporation of Bancorp filed with the Secretary of State of Kentucky on January 12, 1988. Exhibit 3.1 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
3.2
Articles of Amendment to the Articles of Incorporation of Bancorp filed with the Secretary of State of Kentucky on May 8, 1989. Exhibit 3.2 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
3.3
Articles of Amendment to the Articles of Incorporation of Bancorp filed with the Secretary of State of Kentucky on June 30, 1994. Exhibit 3.3 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
3.4
Articles of Amendment to the Articles of Incorporation of Bancorp filed with the Secretary of State of Kentucky on April 29, 1998. Exhibit 3.4 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
3.5
Bylaws of Bancorp, as amended, currently in effect. Exhibit 3.5 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.1*
S.Y. Bancorp, Inc. Stock Option Plan as amended. Exhibit 10.1 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.2*
Stock Yards Bank &Trust Company Senior Officers Security Plan adopted December 23, 1980. Exhibit 10.2 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.3*
Form of Indemnification agreement between Stock Yards Bank & Trust Company, S.Y. Bancorp, Inc. and each member of the Board of Directors. Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.4*
Senior Executive Severance Agreement executed in July, 1994 between Stock Yards Bank & Trust Company and David H. Brooks. Exhibit 10.4 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.5*
Senior Executive Severance Agreement executed in July, 1994 between Stock Yards Bank & Trust Company and David P. Heintzman. Exhibit 10.5 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.6*
Senior Executive Severance Agreement executed in July, 1994 between Stock Yards Bank & Trust Company and Kathy C. Thompson. Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.7*
S.Y. Bancorp, Inc. 1995 Stock Incentive Plan. Exhibit 10.7 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.8*
Amendment Number One to the Senior Executive Severance Agreement executed in February, 1997 between Stock Yards Bank & Trust Company and David H. Brooks. Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.9*
Amendment Number One to the Senior Executive Severance Agreement executed in February, 1997 between Stock Yards Bank & Trust Company and David P. Heintzman. Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.10*
Amendment Number One to the Senior Executive Severance Agreement executed in February, 1997 between Stock Yards Bank & Trust Company and Kathy C. Thompson. Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.11*
Senior Executive Severance Agreement, as amended, executed in February, 1997 between Stock Yards Bank & Trust Company and Nancy B. Davis. Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
10.12*
S.Y. Bancorp, Inc. Amended and Restated 1995 Stock Incentive Plan. Exhibit 10.12 to Annual Report on Form 10-K for the year ended December 31, 2001, of Bancorp is incorporated by reference herein.
Subsidiaries of the Registrant.
Independent Auditors’ Consent.
* Indicates matters related to executive compensation.