Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Fiscal Year Ended

 

Commission File Number

December 31, 2009

 

1-13661

 

S.Y. BANCORP, INC.

1040 East Main Street
Louisville, Kentucky 40206
(502) 582-2571

 

Incorporated in Kentucky

 

I.R.S. No. 61-1137529


 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class:

 

Name of each exchange on which registered:

 

 

Common Stock, no par value

Preferred Share Purchase Rights

 

NASDAQ
NASDAQ

 

 

10.00% Cumulative Trust Preferred Securities and the

 

 

 

 

guarantee with respect thereto

 

NASDAQ

 

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).  Yes  o    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o    No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o    No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  x

 

The aggregate market value of registrant’s voting stock (Common Stock, no par value) held by non-affiliates of the registrant as of June 30, 2009 (the last business day of the registrant’s most recently completed second fiscal quarter) was $287,675,000.

 

The number of shares of the registrant’s Common Stock, no par value, outstanding as of March 5, 2010, was 13,674,676.

 

Documents Incorporated By Reference

 

Portions of Registrant’s definitive proxy statement related to Registrant’s Annual Meeting of Shareholders to be held on April 21, 2010 (the “Proxy Statement”), are incorporated by reference into Part III of this Form 10-K.

 

 

 



Table of Contents

 

S.Y. BANCORP, INC.
Form 10-K
Index

 

 

 

 

Page

Part I:

 

 

 

 

 

 

 

Item 1.

Business

 

3

 

 

 

 

Item 1A.

Risk Factors

 

5

 

 

 

 

Item 1B.

Unresolved Staff Comments

 

8

 

 

 

 

Item 2.

Properties

 

8

 

 

 

 

Item 3.

Legal Proceedings

 

8

 

 

 

 

Item 4.

[Reserved]

 

8

 

 

 

 

Part II:

 

 

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

9

 

 

 

 

Item 6.

Selected Financial Data

 

12

 

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

13

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

Item 8.

Financial Statements and Supplementary Data

 

43

 

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

84

 

 

 

 

Item 9A.

Controls and Procedures

 

84

 

 

 

 

Item 9B.

Other Information

 

87

 

 

 

 

Part III:

 

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

87

 

 

 

 

Item 11.

Executive Compensation

 

87

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

88

 

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

88

 

 

 

 

Item 14.

Principal Accountant Fees and Services

 

88

 

 

 

 

Part IV:

 

 

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

88

 

 

 

 

Signatures

 

91

 

 

 

Index to Exhibits

 

92

 



Table of Contents

 

Part I

 

Item 1.                        Business

 

S. Y. Bancorp, Inc. (Bancorp) was incorporated in 1988 and is a Kentucky corporation headquartered in Louisville, Kentucky. Bancorp is a bank holding company registered with, and subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System. Bancorp has two subsidiaries, Stock Yards Bank & Trust Company (the Bank) and S.Y. Bancorp Capital Trust II (the Trust). The Bank is wholly owned and is a state chartered bank. Bancorp conducts no active business operations; the business of Bancorp is substantially the same as that of the Bank.  The operations of the Bank are fully reflected in the consolidated financial statements of Bancorp.  Accordingly, references to “Bancorp” in this document may encompass both the holding company and the Bank.  The Trust is a Delaware statutory trust that is a 100%-owned finance subsidiary of Bancorp.  See Note 11 to Bancorp’s consolidated financial statements for further discussion of the Trust and its accounting treatment.

 

Stock Yards Bank & Trust Company

 

Stock Yards Bank & Trust Company is the only banking subsidiary of Bancorp and was chartered in 1904.  The Bank is headquartered in Louisville, Kentucky and provides commercial and personal banking services in the Louisville Metropolitan Statistical Area (MSA), Indianapolis and Cincinnati through 28 full service banking offices (See “ITEM 2. PROPERTIES”).  The Bank is chartered under the laws of the Commonwealth of Kentucky.  In addition to traditional commercial and personal banking activities, the Bank has an investment management and trust department offering a wide range of trust administration, investment management, retirement planning, estate administration and financial planning services.  This department operates under the name of Stock Yards Trust Company.  The Bank also originates and sells single-family residential mortgages through Stock Yards Mortgage Company. Additionally, the Bank offers securities brokerage services through an arrangement with a third party provider.  See Note 23 to Bancorp’s consolidated financial statements for the year ended December 31, 2009 for information relating to the Bank’s business segments.

 

At December 31, 2009, the Bank had 470 full-time equivalent employees.  Management of Bancorp strives to be an employer of choice and considers the relationship with employees to be good.

 

Supervision and Regulation

 

Bank holding companies and commercial banks are extensively regulated under both federal and state laws. Any change in applicable laws or regulations may have a material effect on the business and prospects of Bancorp and the Bank.

 

Bancorp, as a registered bank holding company, is subject to the supervision of and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In addition, Bancorp is subject to the provisions of Kentucky’s banking laws regulating bank acquisitions and certain activities of controlling bank shareholders.

 

Kentucky and federal banking statutes delineate permissible activities for Kentucky banks.  Kentucky’s statutes, however, contain a super parity provision for Kentucky banks having a top one or two rating in its most recent regulatory examination.  This provision allows a state bank to engage in any banking activity in which a national bank in Kentucky, a state bank operating in any other state, or a federally chartered thrift could engage.  The bank must first obtain a legal opinion specifying the statutory or regulatory provisions that permit the activity.

 

The Bank is subject to the supervision of the Federal Deposit Insurance Corporation and the Kentucky Department of Financial Institutions. The Federal Deposit Insurance Corporation (FDIC) insures the deposits of the Bank to the current maximums of $250,000 per depositor for time and demand deposit accounts and self-directed retirement accounts.  In addition, the FDIC insures all balances in non-interest bearing demand

 

3



Table of Contents

 

deposit accounts of the Bank through June 30, 2010 as part of the Transaction Account Guarantee portion of the Temporary Liquidity Guarantee Program enacted in 2008.

 

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the 1994 Act) removed state law barriers to interstate bank acquisitions and permits the consolidation of interstate banking operations. Under the 1994 Act, adequately capitalized and managed bank holding companies may acquire banks in any state, subject to Community Reinvestment Act compliance, compliance with federal and state antitrust laws and deposit concentration limits and subject to any state laws restricting the transaction. Kentucky banks are also permitted to acquire a branch in another state if permitted by law of the other state.  Kentucky currently allows out-of-state banks to enter Kentucky to provide banking services on the same terms that a Kentucky bank could enter that bank’s state.

 

The Gramm-Leach-Bliley Act (the GLB Act) allows for affiliations among banks, securities firms and insurance companies by means of a financial holding company (FHC). In most cases, the creation of an FHC is a simple election and notice to the Federal Reserve Board. The GLB Act requires that, at the time of establishment of an FHC, all depository institutions within that corporate group must be “well managed” and “well capitalized” and must have received a rating of “satisfactory” or better under its most recent Community Reinvestment Act examination. Further, non-banking financial firms (for example an insurance company or securities firm) may establish an FHC and acquire a depository institution. While the distinction between banks and non-banking financial firms has been blurring over recent years, the GLB Act makes it less cumbersome for banks to offer services “financial in nature” but beyond traditional commercial banking activities. Likewise, non-banking financial firms may find it easier to offer services that had, heretofore, been provided primarily by depository institutions.  Management of Bancorp has chosen not to become an FHC at this time, but may chose to do so in the future.

 

In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (The “USA Patriot Act”) was signed into law. The USA Patriot Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as the Company’s broker-dealer subsidiary. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.

 

In May 2009, as part of its efforts to rebuild the Deposit Insurance Fund DIF, the FDIC levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. In lieu of further special assessments, in November 2009, the FDIC required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011.

 

On October 3, 2008, in response to the stresses experienced in the financial markets, the Emergency Economic Stabilization Act (EESA) was enacted. EESA authorizes the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program (TARP). In December 2009, Treasury extended TARP, scheduled to expire on December 31, 2009, to October 3, 2010. Pursuant to its authority under EESA, Treasury created the TARP Capital Purchase Program (CPP) under which the Treasury Department would invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions could issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets.  Although it was approved for participation, the Company declined to participate in federal TARP funding because its capital levels were and remain significantly in excess of what is required to be considered “well-capitalized” under regulatory standards.

 

4



Table of Contents

 

Available Information

 

Bancorp files reports with the SEC including the Annual Report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials the Registrant files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.  Bancorp’s 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 are accessible at no cost on Bancorp’s web site at http://www.syb.com after they are electronically filed with or furnished to the SEC.

 

Item 1A.               Risk Factors

 

Investments in Bancorp’s common stock or trust preferred securities involve risk, and Bancorp’s profitability and success may be affected by a number of factors including those discussed below.

 

Our financial condition and profitability depend significantly on local and national economic conditions.

 

Our success depends on general economic conditions both locally and nationally.  Most of our customers are in the Louisville Metropolitan Statistical Area with a growing number of customers in the Indianapolis and Cincinnati areas.  Some of our customers are directly impacted by the local economy while others have more national or global business dealings. Some of the factors influencing general economic conditions include inflation, recession and unemployment. Economic conditions can have an impact on the demand of our customers for loans, the ability of some borrowers to repay these loans, availability of deposits and the value of the collateral securing these loans.

 

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Over half of our loans are secured by real estate (both residential and commercial) in our market area. Adverse changes in the local or national economy could negatively affect our customer’s ability to pay these loans. If borrowers are unable to repay their loans from us and there has been deterioration in the value of the loan collateral, we could experience higher loan losses. Additional increases in loan loss provisions may be necessary in the future. Deterioration in the quality of our credit portfolio can have a material adverse effect on our capital, financial condition and results of operations.

 

Declines in the housing market over the past few years, falling home prices and increasing foreclosures, unemployment and under employment have negatively impacted the credit performance of real estate related loans and resulted in significant write downs of asset values by many financial institutions. These write downs have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. To date, the impact of these adverse conditions has not been severe in the primary market we serve. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

 

Significant stock market volatility could negatively affect our financial results.

 

Capital and credit markets experience volatility and disruption from time to time.  These conditions place downward pressure on credit availability, credit worthiness and our customers’ inclinations to borrow. 

 

5



Table of Contents

 

Prolonged volatility or a significant disruption could negatively impact our customers’ ability to seek new loans or to repay existing loans.  The personal wealth of many of our borrowers and guarantors has historically added a source of financial strength to certain loans and could be negatively impacted by severe market declines.  Sustained reliance on their personal assets to make loan payments would result in deterioration of their liquidity, and could result in loan defaults.

 

Trust assets under management are expressed in terms of market value, and a significant portion of fee income is based upon those values.  Fees earned are directly affected by the performance of the equity and bond markets.  Declines in asset values result in a decrease in income from investment management and trust services.

 

If our actual loan losses are greater than our allowance assumption for loan losses, our earnings could decrease.

 

Our loan customers may not repay their loans according to the terms of these loans, the collateral securing the payment of these loans may be insufficient to ensure repayment and the wealth of guarantors providing guarantees to support these loans may be insufficient to aid in the repayment of these loans.  Accordingly, we may experience significant credit losses which could have a material adverse effect on operating results.  We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of real estate and other assets serving as collateral for repayment of many of our loans.  In determining the adequacy of the allowance for loan losses, we consider, among other factors, our loan loss experience and an evaluation of economic conditions.  There has been continued economic softness, particularly slumping housing and commercial real estate market conditions and widespread signs of deteriorating credit quality.  If our assumptions prove to be incorrect or economic problems are worse than projected, our current allowance may not be sufficient to cover loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio.  Such additions to our allowance could have a material adverse impact on our financial results.

 

In addition, federal and state regulators periodically review our allowance for loan losses and may require an increase in our provision for loan losses or further loan charge-offs. If the regulatory agencies take a more aggressive stance in a focus on credit quality, and require any increase in our provision for loan losses or loan charge-offs for which we had not allocated, it would have a negative effect on net income.

 

Fluctuations in interest rates could reduce our profitability.

 

Our primary source of income is from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings.  We expect to periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa.  In either event, if market interest rates should move contrary to our position, this “gap” will work against us and our earnings may be negatively affected.

 

Many factors affect the fluctuation of market interest rates, including, but not limited to the following:

 

·                  inflation;

·                  recession;

·                  a rise in unemployment;

·                  tightening money supply;

·                  international disorder and instability in domestic and foreign financial markets;

·                  the Federal Reserve reducing rates; and

·                  competition from other financial institutions.

 

Prevailing interest rates are at historically low levels, and indications are that the Federal Reserve will likely maintain the low rates for much of the upcoming year.  An increase in interest rates of up to 2% will decrease our net interest income, primarily because the majority of our variable rate loans have floors of 4% or higher.  Our asset-liability management strategy, which is designed to mitigate our risk from changes in market

 

6



Table of Contents

 

interest rates, may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.  Our most recent earnings simulation model estimating the impact of changing interest rates on earnings indicates net interest income will increase by approximately 4% if interest rates immediately decrease 100 basis points for the next 12 months and decrease approximately 1% if rates increase 200 basis points.  The scenario of rates decreasing 200 basis points is not reasonably possible given current low rates for short-term instruments and most deposits. Additionally, we have observed that competitor banks may be willing to pay rates on deposits well in excess of normal market rates, depending on their liquidity needs.

 

Competition with other financial institutions could adversely affect our profitability.

 

We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. We face vigorous competition from banks and other financial institutions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services. Additionally, we encounter competition from smaller community banks in our markets, as well as regional banks expanding into Jefferson County, the largest county in Kentucky and our primary market.  We also compete with other non-traditional providers of financial services, such as brokerage firms, insurance companies and credit unions. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our results of operations and financial condition.

 

Our accounting policies and methods are critical to how we report our financial condition and results of operations. They require management to make estimates about matters that are uncertain.

 

Accounting policies and methods are fundamental to how we record and report the financial condition and results of operations. We must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with Generally Accepted Accounting Principles in the United States (US GAAP).

 

We have identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, or reducing a liability. We have established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding our judgments and the estimates pertaining to these matters, there can be no assurances that actual results will not differ from those estimates. See the “Critical Accounting Policies” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

 

An extended disruption of vital infrastructure or a security breach could negatively impact our business, results of operations, and financial condition.

 

Our operations depend upon, among other things, our infrastructure, including equipment and facilities.  Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, information systems breaches, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations and financial condition.  Our business recovery plan may not work as intended or may not prevent significant interruption of our operations.  The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in the loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have an adverse effect on our financial condition and results of operation.

 

7



Table of Contents

 

We operate in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations.

 

We are subject to extensive regulation, supervision and examination by federal and state banking authorities.  Any change in applicable regulations or federal or state legislation could have a substantial impact on our bank and its operations.  Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority and operations, which could have a material adverse effect on our financial condition and results of operations.  Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties.  The exercise of regulatory power may have negative impact on our results of operations and financial condition.

 

Item 1B.               Unresolved Staff Comments

 

Bancorp has no unresolved SEC staff comments.

 

Item 2.        Properties

 

The principal offices of Bancorp and the Bank are located at 1040 East Main Street, Louisville, Kentucky. The Bank’s operations center is a part of the main office complex. In addition to the main office complex, the Bank owned thirteen branch properties at December 31, 2009 (two of which are located on leased land).  At that date, the Bank also leased fourteen branch facilities.  Of the twenty-eight banking locations, twenty-five are located in the Louisville MSA, two are located in Indianapolis, Indiana MSA and one is located in Cincinnati, Ohio. In 2009, the Company acquired property for one additional location in the Cincinnati market, and agreed to lease another, with both offices projected to open in 2010.  See Notes 5 and 17 to Bancorp’s consolidated financial statements for the year ended December 31, 2009, for additional information relating to amounts invested in premises, equipment and lease commitments.

 

Item 3.        Legal Proceedings

 

See Note 17 to Bancorp’s consolidated financial statements for the year ended December 31, 2009, for information relating to legal proceedings.

 

Item 4.                        [Reserved]

 

None

 

Executive Officers of the Registrant

 

The following table lists the names and ages (as of December 31, 2009) of all current executive officers of Bancorp. Each executive officer is appointed by Bancorp’s Board of Directors to serve at the discretion 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.

 

Name and Age
of Executive Officer

 

Position and Offices
with Bancorp

David P. Heintzman
Age 50

 

Chairman and Chief Executive Officer

 

 

 

James A. Hillebrand
Age 41

 

President and Director

 

 

 

Kathy C. Thompson
Age 48

 

Senior Executive Vice President and Director

 

 

 

Nancy B. Davis
Age 54

 

Executive Vice President, Secretary, Treasurer and Chief Financial Officer

 

8



Table of Contents

 

Mr. Heintzman was appointed Chairman and Chief Executive Officer effective January 1, 2006.  Prior thereto, he served as President of Bancorp and the Bank since 1992. Mr. Heintzman joined the Bank in 1985.

 

Mr. Hillebrand was appointed President effective July 15, 2008.  Prior thereto, he served as Executive Vice President and Director of Private Banking of the Bank since 2005. From 2000 to 2004, he served as Senior Vice President of Private Banking.  Mr. Hillebrand joined the Bank in 1996.

 

Ms. Thompson was appointed Senior Executive Vice President in January 2006.  Prior thereto, she served as Executive Vice President of Bancorp and the Bank. She joined the Bank in 1992 and is Manager of the Investment Management and Trust Department.

 

Ms. Davis was appointed Executive Vice President of Bancorp and the Bank in 1999 and Chief Financial Officer in 1993.  She joined the Bank in 1991.

 

Part II

 

Item 5.                        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Bancorp’s common stock is traded on the NASDAQ Global Select Market under the ticker symbol SYBT.  Prior to July 2006, the stock traded on the American Stock Exchange under the symbol SYI.  The table below sets forth the quarterly high and low market closing 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 16 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, 2009, Bancorp had 1,317 shareholders of record, and approximately 3,600 non-objecting beneficial owners holding shares in nominee or “street” name.

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Cash dividends

 

 

 

 

 

Cash dividends

 

Quarter

 

High

 

Low

 

declared

 

High

 

Low

 

declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First

 

$

27.50

 

$

18.65

 

$

0.17

 

$

25.96

 

$

20.85

 

$

0.17

 

Second

 

27.39

 

23.65

 

0.17

 

25.82

 

20.82

 

0.17

 

Third

 

25.07

 

21.56

 

0.17

 

34.00

 

19.94

 

0.17

 

Fourth

 

23.88

 

21.17

 

0.17

 

31.63

 

20.78

 

0.17

 

 

9



Table of Contents

 

The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended December 31, 2009.

 

 

 

Total Number of
Shares
Purchased (1)

 

Average Price Paid
Per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plan (2)

 

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan

 

 

 

 

 

 

 

 

 

 

 

October 1-October 31

 

 

$

 

 

 

November 1-November 30

 

2,424

 

22.52

 

 

 

December 1-December 31

 

1,782

 

21.50

 

 

 

Total

 

4,206

 

$

22.09

 

 

 

 


(1)                                  Fourth quarter 2009 activity represents shares surrendered by officers, the fair value of which equaled the exercise price of stock options.  This activity has no impact on the number of shares that may be purchased under a Board-approved plan.

 

(2)                                  The Board of Directors of S.Y. Bancorp Inc. first approved a share buyback plan in 1999, and in February 2005, July 2007, and November 2007 expanded the plan to allow for the repurchase of additional shares.  The stock repurchase program expired in November 2008, and has not been renewed.

 

10


 


Table of Contents

 

The following performance graph and data shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed soliciting material or subject to Regulation 14A of the Exchange Act or incorporated by reference in any filing under the Exchange Act or the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

 

The graph compares the performance of Bancorp Common Stock to the Russell 2000 index, the SNL NASDAQ Bank index and the SNL Midwest Bank index for Bancorp’s last five fiscal years. The graph assumes the value of the investment in Bancorp Common Stock and in each index was $100 at December 31, 2004 and that all dividends were reinvested.

 

 

 

 

Period Ending

 

Index

 

12/31/04

 

12/31/05

 

12/31/06

 

12/31/07

 

12/31/08

 

12/31/09

 

S.Y. Bancorp, Inc.

 

100.00

 

105.90

 

127.15

 

111.52

 

131.65

 

105.34

 

Russell 2000 Index

 

100.00

 

104.55

 

123.76

 

121.82

 

80.66

 

102.58

 

SNL Midwest Bank Index

 

100.00

 

96.36

 

111.38

 

86.81

 

57.11

 

48.40

 

SNL NASDAQ Bank Index

 

100.00

 

96.95

 

108.85

 

85.45

 

62.06

 

50.34

 

 

11



Table of Contents

 

Item 6.                        Selected Financial Data

 

Selected Consolidated Financial Data

 

 

 

Years ended December 31

 

(Dollars in thousands except per share data)

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

58,675

 

$

56,858

 

$

53,691

 

$

53,875

 

$

49,235

 

Provision for loan losses

 

12,775

 

4,050

 

3,525

 

2,100

 

225

 

Net income

 

16,308

 

21,676

 

24,052

 

22,896

 

21,644

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data

 

 

 

 

 

 

 

 

 

 

 

Net income, basic

 

$

1.20

 

$

1.61

 

$

1.70

 

$

1.58

 

$

1.48

 

Net income, diluted

 

1.19

 

1.59

 

1.67

 

1.55

 

1.46

 

Cash dividends declared

 

0.68

 

0.68

 

0.63

 

0.57

 

0.45

 

Book value

 

11.29

 

10.72

 

9.78

 

9.54

 

8.67

 

Market value

 

21.35

 

27.50

 

23.94

 

28.00

 

23.83

 

 

 

 

 

 

 

 

 

 

 

 

 

Average balances

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

$

150,721

 

$

136,112

 

$

139,357

 

$

131,971

 

$

121,614

 

Assets

 

1,717,474

 

1,567,967

 

1,413,614

 

1,353,651

 

1,270,178

 

Federal Home Loan Bank advances

 

80,904

 

86,011

 

65,699

 

34,466

 

25,809

 

Long-term debt

 

40,930

 

3,361

 

93

 

10,458

 

20,769

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected ratios

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

0.95

%

1.38

%

1.70

%

1.69

%

1.70

%

Return on average stockholders’ equity

 

10.82

 

15.93

 

17.26

 

17.35

 

17.80

 

Average stockholders’ equity to average assets

 

8.78

 

8.68

 

9.86

 

9.75

 

9.57

 

Net interest rate spread

 

3.35

 

3.51

 

3.48

 

3.77

 

3.79

 

Net interest rate margin, fully tax-equivalent

 

3.68

 

3.93

 

4.16

 

4.37

 

4.25

 

Efficiency Ratio

 

58.81

 

57.35

 

54.68

 

55.76

 

57.51

 

Non-performing loans to total loans

 

0.84

 

0.35

 

0.28

 

0.59

 

0.44

 

Non-performing assets to total assets

 

0.77

 

0.39

 

0.49

 

0.65

 

0.59

 

Net charge offs to average loans

 

0.59

 

0.16

 

0.20

 

0.18

 

0.07

 

Allowance for loan losses to total loans

 

1.39

 

1.14

 

1.12

 

1.06

 

1.14

 

 

Per share information has been adjusted to reflect 5% stock dividend effective May 2006.

 

12



Table of Contents

 

Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The purpose of this discussion is to provide information as to the analysis of the consolidated financial condition and results of operations of S.Y. Bancorp, Inc. (Bancorp) and its wholly owned subsidiary, Stock Yards Bank & Trust Company (the Bank).  Bancorp, incorporated in 1988, has no active business operations. Thus, Bancorp’s business is substantially the same as that of the Bank. The Bank has operated continuously since it opened in 1904. The Bank conducted business at one location for 85 years and then began branching. At December 31, 2009, the Bank had twenty-five full service banking locations in the Louisville Metropolitan Statistical Area (MSA), two full service banking locations in Indianapolis, Indiana, and one full service banking location in Cincinnati, Ohio. In 2009, the Company acquired property for one additional location in the Cincinnati market, and agreed to lease another, with both offices projected to open in 2010.  The Bank’s focus on flexible, attentive customer service has been key to its growth and profitability. The wide range of services added by the investment management and trust department, the brokerage department, and 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. These forward-looking statements may be identified by the use of words such as “expect”, “anticipate”, “plan”, “foresee” or other words with similar meaning.  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 markets in which Bancorp and its subsidiaries operate; competition for the Bank’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 the Bank’s customers; or other risks detailed in Bancorp’s filings with the Securities and Exchange Commission and Item 1A of this Form 10-K 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.  In preparing the consolidated financial statements in accordance with US 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.

 

Management has identified the accounting policy related to the allowance and provision for loan losses as critical to the understanding of Bancorp’s results of operations and discussed this conclusion with the Audit Committee of the Board of Directors.  Since the application of this policy requires significant management assumptions and estimates, it could result in materially different amounts to be reported if conditions or underlying circumstances were to change.  Assumptions include many factors such as changes in borrowers’ financial condition which can change quickly or historical loss ratios related to certain loan portfolios which may or may not be indicative of future losses.  To the extent that management’s assumptions prove incorrect, the results from operations could be materially affected by a higher provision for loan losses.  The impact and any associated risks related to this policy on Bancorp’s business operations are discussed in the “Allowance for Loan Losses” section below.

 

Additionally, management has identified the accounting policy related to accounting for income taxes as critical to the understanding of Bancorp’s results of operations and discussed this conclusion with the Audit Committee of the Board of Directors.  The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns.  Judgment is required in assessing the future tax consequences of events that have been recognized in

 

13



Table of Contents

 

Bancorp’s financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences, including the effects of IRS examinations and examinations by other state agencies, could materially impact Bancorp’s financial position and its results from operations.  Additional information regarding income taxes is discussed in the “Income Taxes” section below.

 

Overview of 2009

 

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.

 

In 2009, Bancorp completed a solid year of asset and deposit growth, which helped to offset the impact that a declining interest rate environment had on net interest margin.  Net income declined 25% from 2008 due to lower net interest margin, a higher provision for loan losses, and increasing non-interest expenses, particularly FDIC insurance.

 

As is the case with most banks, the primary source of Bancorp’s revenue is net interest income and fees from various financial services provided to customers.  Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities.  Loan volume and the interest rates earned on those loans are critical to overall profitability. Similarly deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability.  Business volumes are influenced by overall economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.

 

Bancorp’s loan portfolio increased 6% during 2009 to $1.4 billion, and this was the driving force for growth in interest income.  Loan growth, funded by increased deposits, resulted in an increase in net interest income on a year to year basis.  Increased loan volume helped to partially offset the negative effect of the declining margin the Bank has experienced.  Historic low interest rates caused margin erosion as loans and other assets repriced lower, while deposit rates hovered near zero, due to the absolute level of prevailing rates.  The average rate earned on assets decreased in 2009 as the rates earned on loans and investments declined.  Rates paid on liabilities decreased slightly less than rates earned on assets, contributing to a decreased net interest spread and net interest margin on a year to year basis.

 

Distinguishing Bancorp from other similarly sized community banks is its diverse revenue stream, and non-interest income continued to be a key contributor to earnings in 2009.  Total non-interest income increased 7% from 2008 to 2009 and non-interest income as a percentage of total revenues increased to 34% in 2009 from 33% in 2008. The increase is due largely to gains on sales of mortgage loans, higher mortgage banking fees, as well as realized and unrealized gains on an investment in a domestic private investment fund.  Income from investment management and trust services, which constitutes the single largest component of non-interest income declined 8% for the year due to lower asset values and a reduction in non-recurring estate fees. Revenue is earned as a percentage of the market value of the assets under management and therefore is tied directly to the broader market’s overall performance.  In addition, Bancorp experienced declines in service charges on deposit accounts, brokerage income and bank owned life insurance income.  Partially offsetting the declines were increases in revenues from bankcard transactions and reduced losses on sales of securities during the year.

 

Also impacting 2009 results, Bancorp increased the 2009 loan loss provision by $8,725,000 to $12,775,000.  While our relative amounts of non-performing loans and non-performing assets are above the historic ranges for their metrics during the last five years, they remain substantially below industry averages.  Management’s actions to increase the allowance for loan losses in 2009 reflect a methodology that is driven by risk ratings.  Certain loans were downgraded during 2009, resulting in higher required allocations in the allowance for loans losses.  In addition, in late February 2010, new information came to light regarding what had been a performing commercial and industrial loan relationship.  Loans to this single borrower totaled approximately $4,125,000 and were secured by business assets and life insurance. Subsequent to year end management discovered that the guarantor had multiple borrowing relationships with other lenders, has been named as a defendant in two lawsuits, one of which alleged fraud, and has personally filed for bankruptcy protection. While the borrower has yet to file for bankruptcy protection, information gathered from the personal bankruptcy and

 

14



Table of Contents

 

disclosed by the guarantor’s counsel leads management to believe that the financial records of the borrower have been falsified, the collateral pledged to secure the loans has little or no value, and the borrower and guarantor have no ability to perform.  While Bancorp discovered the suspected frauds in first quarter 2010, they appear to be of longstanding nature. Accordingly, management charged off the loans in their entirety and recorded an additional provision for loan losses of $4,125,000 as of December 31, 2009.

 

Tangible common equity (TCE), a non-GAAP measure, is a measure of a company’s capital which is useful in evaluating the quality and adequacy of capital.  It is calculated by subtracting the value of intangible assets and any preferred equity from the book value of the Company.  A summary of our TCE ratios at December 31, 2009 and 2008 is shown in the following table.

 

(in thousands, except per share data)

 

December 31, 2009

 

December 31, 2008

 

 

 

 

 

 

 

Total equity

 

$

153,614

 

$

144,500

 

Less goodwill

 

(682

)

(682

)

Tangible common equity

 

152,932

 

143,818

 

 

 

 

 

 

 

Total assets

 

1,791,479

 

1,628,763

 

Less goodwill

 

(682

)

(682

)

Total tangible assets

 

1,790,797

 

1,628,081

 

 

 

 

 

 

 

Tangible common equity ratio

 

8.54

%

8.83

%

 

 

 

 

 

 

Number of outstanding shares

 

13,607

 

13,474

 

 

 

 

 

 

 

Tangible common equity per share

 

$

11.24

 

$

10.67

 

 

See “Non-GAAP Financial Measures” for reconcilement of TCE to US GAAP measures.

 

Challenges for 2010 will include managing credit quality and achieving continued loan growth.

 

·                  A continued economic downturn would cause us to have a higher level of non-performing loans, which would negatively impact net income.

·                  Although thus far we have avoided many of the consequences of lending practices that have troubled other banks, we are not likely to completely escape the impact of declining real estate values and their effect on credit quality, even though our markets have fared reasonably well in the downturn so far.  We recognize that only a recovery in the general economy will ultimately bring this challenging credit cycle to an end.

·                  To achieve our profitability goals for 2010, net loan growth must continue at a pace in excess of 2009. This will be impacted by competition and prevailing economic conditions.  While we believe there is significant opportunity for growth in the Louisville MSA, we know that our ability to deliver attractive growth over the long-term is linked to our success in new markets, including Indianapolis and Cincinnati.

·                  The Federal Reserve Board lowered its key short term rate in 2008 to unprecedentedly low levels, and rates have remained low throughout 2009 and into 2010.  Indications are that the Federal Reserve will keep short term rates low throughout most of 2010.  Approximately 40% of the Bank’s loans are indexed to the prime interest rate and reprice immediately with Federal Reserve rate changes. However, approximately 68% of variable rate loans have reached their contractual floor of 4% or higher, meaning they will not reprice immediately when the prime rate increases.  Deposit rates do not reprice as quickly as loans.

 

15


 

 


Table of Contents

 

·                  We expect net interest margin to be fairly consistent in 2010 with the level seen in the fourth quarter of 2009 as rates are expected to be largely unchanged until the fourth quarter of 2010.  This would result in an increase in net interest margin over the level seen in 2009.  Increased deposit and loan rate competition could negatively impact this expectation.

·                  We expect a decrease in non-interest income for 2010 relating to service charges on deposits, and we expect increases in non-interest expense including personnel and occupancy expenses as we open two new locations.

 

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

 

Results of Operations

 

Net income was $16,308,000 or $1.19 per share on a diluted basis for 2009 compared to $21,676,000 or $1.59 per share for 2008 and $24,052,000 or $1.67 per share for 2007.  Net income for 2009 was postively impacted by:

 

·                  A 3% or $1.8 million increase in net interest income.

·                  A 7% or $1.9 million, increase in non-interest income.

·                  A 31% or $3.1 million decrease in income taxes.

 

Net income for 2009 was negatively impacted by:

 

·                  A 215% or $8.7 million increase in provision for loan losses.

·                  A 7% or $3.5 million increase in non-interest expenses.

 

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, represents 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.  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.

 

Comparative information regarding net interest income follows:

 

(Dollars in thousands)

 

2009

 

2008

 

2007

 

2009/2008
Change

 

2008/2007
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income, tax-equivalent basis

 

$

59,729

 

$

57,872

 

$

54,768

 

3.21

%

5.7

%

Net interest spread

 

3.35

%

3.51

%

3.48

%

(16

)bp

3

bp

Net interest margin

 

3.68

%

3.93

%

4.16

%

(25

)bp

(23

)bp

Average earning assets

 

$

1,621,757

 

$

1,472,098

 

$

1,315,925

 

10.2

%

11.9

%

Five year Treasury bond at year end

 

2.69

%

1.55

%

3.45

%

114

bp

(190

)bp

Average five year Treasury bond

 

2.19

%

2.79

%

4.42

%

(60

)bp

(163

)bp

Prime rate at year end

 

3.25

%

3.25

%

7.25

%

0

bp

(400

)bp

Average prime rate

 

3.25

%

5.09

%

8.05

%

(184

)bp

(296

)bp

 


bp = basis point = 1/100th of a percent

 

16



Table of Contents

 

Prime rate and the five year Treasury bond are included above to provide a general indication of the interest rate environment in which the Bank operated.  Approximately 40% of the Bank’s loans are variable rate and most of these loans are indexed to the Bank’s prime rate and may reprice as the prime rate changes.  However, approximately $405 million, or 68% of variable rate loans, have reached their contractual floor of 4% or higher.  Approximately $155 million or 26% of variable rate loans have no contractual floor; however, the Bank intends to establish floors whenever possible upon renewal of the loans.  The remaining $39 million of variable rate loans, or 6% of variable rate loans, have contractual floors below 4%.  The Bank’s variable rate loans are primarily comprised of commercial lines of credit and real estate loans.  At inception, most of the Bank’s fixed rate loans are priced in relation to the five year Treasury bond and the persistence of low short term rates has held those rates low.  In addition to pressure on earning assets from the lower rate environment, many deposit rates are at or near a floor and are not able to be reduced to the same degree as loans.  Margin erosion also reflected higher interest expense in the current year related to the Company’s December 2008 issuance of trust preferred securities, and the impact of maintaining a significantly higher liquidity position in 2009, which management considered prudent given the operating environment.

 

Average loan balances increased $96 million or 7.4% in 2009; however, the declining interest rate environment drove average loan yields lower by 66 basis points.  Bancorp grew average interest bearing deposits $93 million or 9.0% to fund loan growth.  Average FHLB advances decreased by $5.1 million or 5.9%, with average rates decreasing by 44 basis points.  Average long-term debt increased $37.5 million from $3.4 million in 2008 to $40.9 million in 2009, reflecting the subordinated debt issued in 2008.  Average interest costs on interest bearing deposits decreased 77 basis points, again reflecting the declining interest rate market.  The rate changes, combined with the volume increases, resulted in an increase in net interest income, but a decrease in net interest margin for 2009 compared to 2008.

 

For 2010, management anticipates a stable prime rate for the first three quarters, with a slight increase in the fourth quarter. The Company believes the net interest margin is stabilizing and that CD maturities of approximately $181 million, or 36% of total CDs, in the next two quarters could spark slight improvement in the net interest margin.  This expectation is based on current loan and deposit pricing in the markets in which the Company operates.  However, the margin could be impacted negatively if competition causes increases in deposit rates or a decline in loan pricing in those markets.

 

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, 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.

 

17



Table of Contents

 

Interest Rate Simulation Sensitivity Analysis

 

Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one year forecast. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time.  The model is therefore a tool to indicate earnings trends in given interest rate scenarios and does not indicate actual expected results.  The December 31, 2009 simulation analysis, which shows very little interest rate sensitivity, indicates that an increase in interest rates of 100 to 200 basis points would have a slightly negative effect on net interest income, and a decrease of 100 to 200 basis points in interest rates would have a positive effect on net interest income.  These estimates are summarized below.

 

 

 

Net Interest
Income %
Change

 

 

 

 

 

Increase 200 bp

 

(0.56

)

Increase 100 bp

 

(1.80

)

Decrease 100 bp

 

3.87

 

Decrease 200 bp

 

2.64

 

 

Approximately 28% of total loans are indexed to the prime rate, and have floors of 4% or higher.  Since the prime rate is currently 3.25%, rates would have to increase more than 75 bp before the rates on such loans will rise.  This effect, captured in our simulation analysis above, negatively impacts the effect of rising rates.  Analysis of rates increasing 300 bp or higher indicates a positive effect on net interest income.

 

The scenario of rates decreasing 200 bp is not reasonably possible given current low rates for short-term instruments and most deposits.

 

Undesignated derivative instruments described in Note 20 are recognized on the consolidated balance sheet at fair value, with changes in fair value, due to changes in prevailing interest rates, recorded in other noninterest income. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above.

 

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 2009 and 2008 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 the change due to volume in proportion to the relationship of the absolute dollar amounts of the change in each.

 

18



Table of Contents

 

Taxable Equivalent Rate/Volume Analysis

 

 

 

2009/2008

 

2008/2007

 

 

 

 

 

Increase (Decrease)

 

 

 

Increase (Decrease)

 

 

 

 

 

Due to

 

 

 

Due to

 

(In thousands)

 

Net Change

 

Rate

 

Volume

 

Net Change

 

Rate

 

Volume

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

(3,291

)

$

(9,009

)

$

5,718

 

$

(4,012

)

$

(13,347

)

$

9,335

 

Federal funds sold

 

(399

)

(616

)

217

 

(466

)

(703

)

237

 

Mortgage loans held for sale

 

171

 

(16

)

187

 

(7

)

(37

)

30

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

131

 

(999

)

1,130

 

410

 

(271

)

681

 

Tax-exempt

 

163

 

50

 

113

 

(97

)

42

 

(139

)

Total interest income

 

(3,225

)

(10,590

)

7,365

 

(4,172

)

(14,316

)

10,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

(464

)

(530

)

66

 

(2,062

)

(2,067

)

5

 

Savings deposits

 

68

 

53

 

15

 

(128

)

(135

)

7

 

Money market deposits

 

(3,337

)

(3,877

)

540

 

(2,310

)

(4,973

)

2,663

 

Time deposits

 

(2,798

)

(4,031

)

1,233

 

(2,361

)

(3,872

)

1,511

 

Securities sold under agreements to repurchase and federal funds purchased

 

(821

)

(748

)

(73

)

(1,714

)

(1,507

)

(207

)

Other short-term borrowings

 

(436

)

(229

)

(207

)

312

 

(73

)

385

 

Federal Home Loan Bank advances

 

(587

)

(362

)

(225

)

782

 

(151

)

933

 

Long-term debt

 

3,293

 

102

 

3,191

 

205

 

(1

)

206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest expense

 

(5,082

)

(9,622

)

4,540

 

(7,276

)

(12,779

)

5,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

1,857

 

$

(968

)

$

2,825

 

$

3,104

 

$

(1,537

)

$

4,641

 

 

Bancorp’s net interest income increased $1,857,000 for the year ended December 31, 2009 compared to the same period of 2008 while 2008 compared to 2007 saw a $3,104,000 increase.  Net interest income for the year 2009 compared to 2008 was positively impacted by an increase in loan and securities volume and a decrease in deposit and other borrowing rates.  Net interest income was negatively impacted by a decline in the average rate earned on assets and an increase in the volume of liabilities.  Loan volume increases boosted net interest income by $5,718,000 and declining rates on deposits contributed $8,385,000 to the increase of net interest income.  Partially offsetting the increases, declining rates on loans negatively impacted net interest income by $9,009,000, and growth in deposit balances negatively impacted the margin by $1,854,000.  Increasing volume on long-term debt negatively impacted the margin by $3,191,000.

 

For the year 2008 compared to 2007, loan growth accounted for $9,335,000 of the increase in interest income, offset by lower rates which accounted for a decrease of $13,347,000.  Lower rates on deposit accounts resulted in a decreased interest expense of $11,047,000, which was somewhat offset by increased interest expense of $4,186,000 due to higher rates on money market and time deposits.

 

19



Table of Contents

 

Provision for Loan Losses

 

In determining the provision for loan losses charged to expense, management considers many factors. Among these are the quality and underlying collateral of the loan portfolio, previous loss experience, the size and composition of the loan portfolio, changes in lending personnel and an assessment of the impact of current economic conditions on borrowers’ ability to pay. The provision for loan losses is summarized below:

 

(Dollars in thousands)

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

$

12,775

 

$

4,050

 

$

3,525

 

Allowance to loans at year end

 

1.39

%

1.14

%

1.12

%

Allowance to average loans for year

 

1.44

%

1.19

%

1.16

%

 

The provision for loan losses increased $8,725,000 during 2009 compared to 2008 in response to Bancorp’s assessment of inherent risk in the loan portfolio.  The provision for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysis of the risk in the loan portfolio. The increased provision for 2009 reflects an allowance methodology that is driven by risk ratings.  Certain loans were downgraded during 2009, resulting in higher required allocations in the allowance for loans losses.  Ultimately, this required a higher provision.  Bancorp intends to continue with its historically conservative stance toward credit quality, remaining cautious in assessing the potential risk in the loan portfolio.  In addition, in late February 2010, new information came to light regarding what had been a performing commercial and industrial loan relationship.  Loans to this single borrower totaled approximately $4,125,000 and were secured by business assets and life insurance. Subsequent to year end, management discovered that the guarantor had multiple borrowing relationships with other lenders, has been named as a defendant in two lawsuits, one of which alleged fraud, and has personally filed for bankruptcy protection. While the borrower has yet to file for bankruptcy protection, information gathered from the personal bankruptcy and disclosed by the guarantor’s counsel leads management to believe that the financial records of the borrower have been falsified, the collateral pledged to secure the loans has little or no value, and the borrower and guarantor have no ability to perform.  While Bancorp discovered the suspected frauds in first quarter 2010, they appear to be of longstanding nature. Accordingly, management charged off the loans in their entirety and recorded an additional provision for loan losses of $4,125,000 as of December 31, 2009.

 

Non-performing loans increased from $4,710,000 at year-end 2008 to $12,101,000 at December 31, 2009.  The ratio of non-performing loans to total loans was 0.84% at December 31, 2009, up from 0.35% at December 31, 2008.  Net charge-offs totaled 0.59% of average loans at year-end 2009, up from 0.16% at year-end 2008.  Contributing 30 bp to the increase in charge-offs was the subsequent event discussed above.  While the Company’s metrics for net charge-offs and non-performing loans remain at relatively low levels compared to the banking industry, management continues to feel that a prolonged recession could place additional pressure on credit quality in determining the provision and allowance for loan losses.  See “Financial Condition-Non-performing 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 metropolitan areas of Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio.  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, 2009 is adequate to absorb probable 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.

 

20


 

 


Table of Contents

 

Non-Interest Income and Non-Interest Expenses

 

The following table provides a comparison of the components of non-interest income for 2009, 2008 and 2007. The table shows the dollar and percentage change from 2008 to 2009 and from 2007 to 2008. Below the table is a discussion of significant changes and trends.

 

 

 

 

 

 

 

 

 

2009/2008

 

2008/2007

 

(Dollars in thousands)

 

2009

 

2008

 

2007

 

Change

 

%

 

Change

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment management and trust services

 

$

11,180

 

$

12,203

 

$

12,886

 

$

(1,023

)

(8.4

)%

$

(683

)

(5.3

)%

Service charges on deposit acccounts

 

8,098

 

8,350

 

8,758

 

(252

)

(3.0

)

(408

)

(4.7

)

Bankcard transaction revenue

 

2,909

 

2,645

 

2,359

 

264

 

10.0

 

286

 

0.1

 

Gain on sales of mortgage loans held for sale

 

2,163

 

1,253

 

1,164

 

910

 

72.6

 

89

 

7.6

 

Loss on sales of securities available for sale

 

(339

)

(607

)

 

268

 

(44.2

)

(607

)

 

Brokerage commissions and fees

 

1,749

 

1,797

 

1,929

 

(48

)

(2.7

)

(132

)

(6.8

)

Bank owned life insurance income

 

988

 

1,020

 

985

 

(32

)

(3.1

)

35

 

3.6

 

Other

 

3,525

 

1,738

 

2,172

 

1,787

 

102.8

 

(434

)

(20.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

30,273

 

$

28,399

 

$

30,253

 

$

1,874

 

6.6

%

$

(1,854

)

(6.1

)%

 

Total non-interest income increased 6.6% for the year ended December 31, 2009 compared to 2008. The largest component of non-interest income is investment management and trust services. Along with the effects of improving market conditions in 2009, this area of the Bank continues to grow through attraction of new business and retention of existing business. Trust assets under management rose to $1.55 billion at December 31, 2009, compared to $1.35 billion at December 31, 2008, but the average of month-end market values in 2009 was lower than 2008.  However, most fees earned for managing accounts are based on a percentage of market value on a monthly basis and these lower values resulted in corresponding fluctuations in investment management fees. Some revenues of the investment management and trust department, most notably executor fees, are non-recurring in nature and the timing of these revenues corresponds with the administration of estates. For 2009, 2008 and 2007 executor fees totaled approximately $225,000, $545,000 and $1,024,000, respectively. These declines were partially offset by the attraction of net new accounts, consisting primarily of personal accounts.

 

Service charges on deposit accounts decreased $252,000 or 3.0%, for the year ended December 31, 2009 compared to the same period a year ago. The main factor contributing to the decrease was lower non-sufficient fund fee activity in 2009.

 

Bankcard transaction revenue increased $264,000 or 10.0% in 2009 compared to 2008 and primarily represents income the Bank derives from customers’ use of debit cards.  Results in 2009 compared favorably to 2008 as bankcard transaction volume continues to increase.  To earn higher interchange fees, the Company encourages its customers to process their debit card transactions as signature-based transactions and has a rewards program to help with this effort.

 

The Bank’s mortgage banking division originates residential mortgage loans to be sold in the secondary market. Interest rates on the loans sold are locked with the buyer and investor prior to closing the loans, thus Bancorp bears no interest rate risk related to these loans.  The division offers conventional, VA and FHA

 

21



Table of Contents

 

financing, for purchases and refinances, as well as programs for low-income first time home buyers. The mortgage banking division also offers home equity conversion mortgages or “reverse” mortgages insured by the U.S. Department of Housing and Urban Development (HUD). These HUD loans give older homeowners a vehicle for converting equity in their homes to cash.  Interest rates on mortgage loans directly impact the volume of business transacted by the mortgage banking division. Prevailing mortgage interest rates fell substantially in late 2008 and remained at attractive levels during 2009 helping contribute to a significant increase in loan volume — mostly refinance activity.  Also, the well-publicized availability of first-time homebuyer tax credits contributed to an increase in purchase activity in late 2009.

 

Losses on securities available for sale totaled 339,000 for 2009, compared to $607,000 in 2008.  In the fourth quarter of 2009, the Bancorp sold trust preferred securities of a large financial company with a par value of $2,425,000, generating a loss of $359,000, as Management was concerned about the long term prospects of performance of the security.  In addition, the Bancorp sold mortgage-backed securities in the normal course of portfolio management, generating gains of $20,000. Management has the intent and ability to hold all remaining investment securities available for sale for the foreseeable future.

 

Brokerage commissions and fees earned primarily from stock, bond and mutual fund sales decreased 2.7% during 2009 as overall transaction volume was down compared to the prior year.  Bancorp deploys its brokers primarily through its branch network for retail consumers, while larger managed accounts are included in the investment management and trust department.

 

Income related to bank-owned life insurance (“BOLI”) decreased 3.1% during 2009 due to a lower crediting rate.  BOLI generated income of $988,000 and $1,020,000 during 2009 and 2008, respectively. BOLI represents the cash surrender value for life insurance policies on certain key employees who have provided consent for the Bank to be the beneficiary of a portion of such policies.  The related change in cash surrender value and proceeds received under the policies are recorded as non-interest income.  This income helps offset the cost of employee benefits.

 

Other non-interest income increased $1,787,000 during 2009 compared to 2008 primarily due to a $711,000 in realized and unrealized gains of the domestic private investment fund, recorded using the equity method of accounting, an increase of $739,000 in fees related to mortgage banking, such as title and application income, and a variety of other factors, none of which is individually significant.  Other non-interest income decreased in 2008 compared to 2007 partly as a result of realized and unrealized losses of the domestic private investment fund, combined with a variety of factors none of which are individually significant.

 

22



Table of Contents

 

The following table provides a comparison of the components of non-interest expenses for 2009, 2008 and 2007. The table shows the dollar and percentage change from 2008 to 2009 and from 2007 to 2008. Below the table is a discussion of significant changes and trends.

 

 

 

 

 

 

 

 

 

2009/2008

 

2008/2007

 

(Dollars in thousands)

 

2009

 

2008

 

2007

 

Change

 

%

 

Change

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

30,147

 

$

28,209

 

$

27,169

 

$

1,938

 

6.9

%

$

1,040

 

3.8

%

Net occupancy expense

 

4,185

 

4,247

 

3,722

 

(62

)

(1.5

)

525

 

14.1

 

Data processing expense

 

4,479

 

4,108

 

4,760

 

371

 

9.0

 

(652

)

(13.7

)

Furniture and equipment expense

 

1,234

 

1,117

 

1,148

 

117

 

10.5

 

(31

)

(2.7

)

State bank taxes

 

1,765

 

1,334

 

1,155

 

431

 

32.3

 

179

 

15.5

 

FDIC insurance

 

2,687

 

621

 

127

 

2,066

 

332.7

 

494

 

389.0

 

Other

 

8,435

 

9,839

 

8,371

 

(1,404

)

(14.3

)

1,468

 

17.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

52,932

 

$

49,475

 

$

46,452

 

$

3,457

 

7.0

%

$

3,023

 

6.5

%

 

Salaries and benefits are the largest component of non-interest expenses and increased $1,938,000 or 6.9% for 2009 compared to 2008.  This was primarily due to a rise in salaries expense related to the addition of senior staff, as well as increases in healthcare benefits costs and pension expense.  At December 31, 2009, the Bank had 470 full-time equivalent employees compared to 464 at the same date in 2008 and 446 for 2007.  There are no obligations for post-retirement or post-employment benefits.

 

Net occupancy expense decreased 62,000 or 1.5% from 2008 to 2009.  The Bank opened no new locations in 2009 or 2008, and three locations in 2007.  At December 31, 2009 the Bank had twenty-eight banking center locations including the main office.

 

Data processing expense increased $371,000 or 9.0% largely due to increased trust data processing expenses related to tax document preparation in 2009, combined with a one-time reduction of data processing fees in 2008.   The decrease in 2008 as compared to 2007 was largely due to renegotiated terms with the Bank’s provider of ATM network and debit card processing.

 

Furniture and equipment expense increased $117,000 or 10.5% in 2009, as compared to 2008, due to a variety of factors, none of which is individually significant.  Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense.

 

State bank taxes in Kentucky are based primarily on average capital and deposit levels.  Bancorp purchased Commonwealth of Kentucky historic tax preservation credits, as well as state investment tax credits, at a discount to help reduce state bank tax in 2009, 2008 and 2007.  Bancorp used state historic tax credits of approximately $57,000, $36,000 and $195,000 to help reduce state bank tax during 2009, 2008 and 2007, respectively.

 

FDIC insurance expense rose $2,066,000, or 332.7% for the year ended December 31, 2009, as compared to the same period in 2008.  The increases are directly related to an increase in regular deposit assessment rates by the FDIC and a special assessment in the second quarter of 2009.  This special assessment of five basis points of total assets less Tier 1 capital at June 30, 2009, amounted to $786,000, which was recorded as an expense in the second quarter.

 

Other non-interest expenses decreased $1,404,000 for the year ended December 31, 2009 compared to the same period of 2008, primarily due to transactions recorded in 2008 which did not recur in 2009.  These were

 

23



Table of Contents

 

valuation losses on other real estate owned of $289,000, combined with impairment and equity-method charges of $866,000 for an investment in a bank located in one of the Company’s expansion markets.  Also affecting the 2009 expenses was a $227,000 decrease in delivery and communications related expenses, and a variety of factors none of which are individually significant.

 

Income Taxes

 

A three year comparison of income tax expense and effective tax rate follows:

 

(Dollars in thousands)

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Income tax expense

 

$

6,933

 

$

10,056

 

$

9,915

 

Effective tax rate

 

29.8

%

31.7

%

29.2

%

 

For more information regarding income taxes and the effective tax rate see Note 7 to Bancorp’s consolidated financial statements.

 

Financial Condition

 

Earning Assets and Interest Bearing Liabilities

 

Summary information with regard to Bancorp’s financial condition follows:

 

 

 

 

 

 

 

 

 

2009/2008

 

2008/2007

 

(Dollars in thousands)

 

2009

 

2008

 

2007

 

Change

 

%

 

Change

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average earning assets

 

$

1,621,757

 

$

1,472,098

 

$

1,315,925

 

$

149,659

 

10.2

%

$

156,173

 

11.9

%

Average interest bearing liabilities

 

1,330,228

 

1,220,776

 

1,064,754

 

109,452

 

9.0

 

156,022

 

14.7

 

Average total assets

 

1,717,474

 

1,567,967

 

1,413,614

 

149,507

 

9.5

 

154,353

 

10.9

 

Total year end assets

 

1,791,479

 

1,628,763

 

1,482,219

 

162,716

 

10.0

 

146,544

 

9.9

 

 

The Bank has experienced steady growth in earning assets over the last several years primarily in the area of loans.  From 2008 to 2009, average loans increased 7.4%, or $95.9 million, while average securities increased $31.4 million, or 21.2%.  Much of the loan growth is attributed to industrial and multi-family properties and large healthcare facility loans originated with substantial cash equity and strong guarantor support. Our focus has not been on housing and retail construction lending, sources of increased credit risk in the current environment. The Bank has also targeted private banking clientele as having attractive growth potential. Not only do these relationships afford loan growth, but they also bring opportunities to provide full-service financial relationships to business customers as well as provide personal financial services to business owners.  During 2008, average loans increased 11.8% with growth being primarily from commercial and industrial loans and construction loans.

 

Average total interest bearing accounts increased 9.0% and non-interest bearing accounts increased 12.3% in 2009.  The increase in average interest bearing liabilities from 2008 to 2009 occurred primarily in money market and time deposits spurred by promotions to support loan growth.  Bancorp continued to utilize fixed rate advances from the FHLB during 2009 as they compared favorably to similar term time deposits.  Bancorp had an average of $80,904,000 in outstanding FHLB advances in 2009 compared to $86,011,000 and $65,699,000 in 2008 and 2007, respectively.  Average long-term debt increased from $3,361,000 in 2008 to $40,930,000 in 2009, representing the issuance of subordinated debt and trust preferred securities in late 2008.

 

The Company began a correspondent banking division in February 2009, to offer loan and deposit services, asset management, international services, trust operations, and other services to community banks across the Kentucky and southern Indiana region.  At December 31, 2009, federal funds purchased from correspondent banks totaled $18.0 million.

 

24



Table of Contents

 

Average Balances and Interest Rates — Taxable Equivalent Basis

 

 

 

Year 2009

 

Year 2008

 

Year 2007

 

(Dollars in thousands)

 

Average
balances

 

Interest

 

Average
rate

 

Average
balances

 

Interest

 

Average
rate

 

Average
balances

 

Interest

 

Average
rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

42,759

 

$

79

 

0.18

%

$

23,992

 

$

478

 

1.99

%

$

18,212

 

$

944

 

5.18

%

Mortgage loans held for sale

 

7,385

 

389

 

5.27

%

3,856

 

218

 

5.65

%

3,372

 

225

 

6.67

%

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

147,601

 

5,164

 

3.50

%

119,590

 

5,031

 

4.21

%

103,747

 

4,589

 

4.42

%

Tax-exempt

 

27,230

 

1,604

 

5.89

%

24,774

 

1,441

 

5.82

%

27,756

 

1,538

 

5.54

%

FHLB stock

 

5,138

 

214

 

4.17

%

4,175

 

216

 

5.17

%

3,737

 

248

 

6.64

%

Loans, net of unearned income

 

1,391,644

 

77,460

 

5.57

%

1,295,711

 

80,751

 

6.23

%

1,159,101

 

84,763

 

7.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earning assets

 

1,621,757

 

84,910

 

5.24

%

1,472,098

 

88,135

 

5.99

%

1,315,925

 

92,307

 

7.01

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less allowance for loan losses

 

17,688

 

 

 

 

 

14,600

 

 

 

 

 

12,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,604,069

 

 

 

 

 

1,457,498

 

 

 

 

 

1,303,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

25,690

 

 

 

 

 

27,196

 

 

 

 

 

33,305

 

 

 

 

 

Premises and equipment

 

28,034

 

 

 

 

 

28,101

 

 

 

 

 

25,056

 

 

 

 

 

Accrued interest receivable and other assets

 

59,681

 

 

 

 

 

55,172

 

 

 

 

 

51,888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,717,474

 

 

 

 

 

$

1,567,967

 

 

 

 

 

$

1,413,614

 

 

 

 

 

 

 

 

Year 2009

 

Year 2008

 

Year 2007

 

(Dollars in thousands)

 

Average
balances

 

Interest

 

Average
rate

 

Average
balances

 

Interest

 

Average
rate

 

Average
balances

 

Interest

 

Average
rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

$

224,805

 

$

464

 

0.21

%

$

208,902

 

$

928

 

0.44

%

$

208,575

 

$

2,990

 

1.43

%

Savings deposits

 

54,039

 

117

 

0.22

%

42,973

 

49

 

0.11

%

41,388

 

177

 

0.43

%

Money market deposits

 

341,535

 

2,565

 

0.75

%

310,466

 

5,902

 

1.90

%

218,736

 

8,212

 

3.75

%

Time deposits

 

512,669

 

14,855

 

2.90

%

477,382

 

17,653

 

3.70

%

442,036

 

20,014

 

4.53

%

Securities sold under agreements to repurchase and federal funds purchased

 

74,207

 

334

 

0.45

%

79,582

 

1,155

 

1.45

%

86,248

 

2,869

 

3.33

%

Other short-term borrowings

 

1,139

 

 

0.00

%

12,099

 

436

 

3.60

%

1,979

 

124

 

6.27

%

FHLB advances

 

80,904

 

3,341

 

4.13

%

86,011

 

3,928

 

4.57

%

65,699

 

3,146

 

4.79

%

Long-term debt

 

40,930

 

3,505

 

8.56

%

3,361

 

212

 

6.31

%

93

 

7

 

7.53

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest bearing liabilities

 

1,330,228

 

25,181

 

1.89

%

1,220,776

 

30,263

 

2.48

%

1,064,754

 

37,539

 

3.53

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand deposits

 

198,888

 

 

 

 

 

177,110

 

 

 

 

 

170,748

 

 

 

 

 

Accrued interest payable and other liabilities

 

37,637

 

 

 

 

 

33,969

 

 

 

 

 

38,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

1,566,753

 

 

 

 

 

1,431,855

 

 

 

 

 

1,274,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

150,721

 

 

 

 

 

136,112

 

 

 

 

 

139,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,717,474

 

 

 

 

 

$

1,567,967

 

 

 

 

 

$

1,413,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

59,729

 

 

 

 

 

$

57,872

 

 

 

 

 

$

54,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

3.35

%

 

 

 

 

3.51

%

 

 

 

 

3.48

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin

 

 

 

 

 

3.68

%

 

 

 

 

3.93

%

 

 

 

 

4.16

%

 

Notes:

 

·                  Yields on municipal securities have been computed on a fully tax-equivalent basis using the federal income tax rate of 35%.

·                  The approximate tax-equivalent adjustments to interest income were $1,054,000, $1,014,000 and $1,077,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

·                  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, net of deferred costs, included in interest income amounted to $570,000, $591,000 and $453,000 in 2009, 2008 and 2007, respectively.

 

25



Table of Contents

 

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 between earnings sources and credit and liquidity considerations.

 

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.

 

The carrying value of securities is summarized as follows:

 

 

 

December 31

 

(In thousands)

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

 

 

 

 

 

U.S. Treasury and other U.S. government obligations

 

$

3,019

 

$

6,955

 

$

9,805

 

Government sponsored enterprise obligations

 

124,688

 

107,617

 

110,014

 

Mortgage-backed securities – government agencies

 

66,681

 

29,263

 

11,313

 

Obligations of states and political subdivisions

 

32,812

 

27,084

 

24,249

 

Trust preferred securities of financial institutions

 

1,025

 

2,452

 

3,217

 

Other (1)

 

 

 

3,951

 

 

 

 

 

 

 

 

 

 

 

$

228,225

 

$

173,371

 

$

162,549

 

 

 

 

 

 

 

 

 

Securities held to maturity

 

 

 

 

 

 

 

Mortgage-backed securities – government

 

$

35

 

$

43

 

$

59

 

Obligations of states and political subdivisions

 

 

 

1,070

 

 

 

 

 

 

 

 

 

 

 

$

35

 

$

43

 

$

1,129

 

 


(1) Other consisted of preferred stock of other bank holding companies.

 

26



Table of Contents

 

The maturity distribution and weighted average interest rates of securities at December 31, 2009, are as follows:

 

 

 

 

 

 

 

After one but within

 

After five but within

 

 

 

 

 

 

 

Within one year

 

five years

 

ten years

 

After ten years

 

(Dollars in thousands)

 

Amount

 

Rate

 

Amount

 

Rate

 

Amount

 

Rate

 

Amount

 

Rate