Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended September 30, 2011

 

OR

 

o

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

 

For the transition period from                            to                               .

 

Commission file number 1-13661

 

S.Y. BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Kentucky

 

61-1137529

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1040 East Main Street, Louisville, Kentucky 40206

(Address of principal executive offices including zip code)

 

(502) 582-2571

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 x No 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 number of shares of the registrant’s Common Stock, no par value, outstanding as of October 31, 2011, was 13,801,958.

 

 

 



Table of Contents

 

S.Y. BANCORP, INC. AND SUBSIDIARY

 

Index

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

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

 

 

 

Consolidated Balance Sheets September 30, 2011 (Unaudited) and December 31, 2010

 

 

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2011 and  2010 (Unaudited)

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (Unaudited)

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2011 (Unaudited)

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2011 and 2010 (Unaudited)

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 6.

Exhibits

 

 

 

1



Table of Contents

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2011 and December 31, 2010

(In thousands, except share data)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

30,196

 

$

17,702

 

Federal funds sold

 

25,137

 

23,953

 

Mortgage loans held for sale

 

11,012

 

12,387

 

Securities available for sale (amortized cost of $277,739 in 2011 and $240,097 in 2010)

 

286,985

 

245,332

 

Securities held to maturity (fair value of $22 in 2010)

 

 

20

 

Federal Home Loan Bank stock

 

4,948

 

4,771

 

Other securities

 

1,001

 

1,001

 

Loans

 

1,539,055

 

1,508,425

 

Less allowance for loan losses

 

29,066

 

25,543

 

Net loans

 

1,509,989

 

1,482,882

 

Premises and equipment, net

 

35,378

 

31,665

 

Bank owned life insurance

 

26,885

 

26,124

 

Accrued interest receivable

 

5,727

 

6,288

 

Other assets

 

50,696

 

50,820

 

Total assets

 

$

1,987,954

 

$

1,902,945

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

 

$

285,265

 

$

247,465

 

Interest bearing

 

1,291,295

 

1,246,003

 

Total deposits

 

1,576,560

 

1,493,468

 

Securities sold under agreements to repurchase

 

69,818

 

60,075

 

Federal funds purchased

 

13,412

 

25,436

 

Other short-term borrowings

 

1,265

 

1,998

 

Accrued interest payable

 

155

 

304

 

Other liabilities

 

41,857

 

50,461

 

Federal Home Loan Bank advances

 

60,434

 

60,442

 

Subordinated debentures

 

40,900

 

40,900

 

Total liabilities

 

1,804,401

 

1,733,084

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding

 

 

 

Common stock, no par value. Authorized 20,000,000 shares; issued and outstanding 13,800,681 and 13,736,942 shares in 2011 and 2010, respectively

 

6,891

 

6,679

 

Additional paid-in capital

 

14,121

 

12,206

 

Retained earnings

 

156,794

 

147,837

 

Accumulated other comprehensive income

 

5,747

 

3,139

 

Total stockholders’ equity

 

183,553

 

169,861

 

Total liabilities and stockholders’ equity

 

$

1,987,954

 

$

1,902,945

 

 

See accompanying notes to unaudited consolidated financial statements.

 

2



Table of Contents

 

S.Y.  BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

For the three and nine months ended September 30, 2011 and 2010 (Unaudited)

(In thousands, except per share data)

 

 

 

For three months ended

 

For nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans

 

$

19,868

 

$

20,285

 

$

59,343

 

$

59,214

 

Federal funds sold

 

72

 

41

 

167

 

85

 

Mortgage loans held for sale

 

46

 

97

 

143

 

216

 

Securities – taxable

 

1,319

 

1,271

 

3,811

 

4,051

 

Securities – tax-exempt

 

311

 

324

 

1,006

 

857

 

Total interest income

 

21,616

 

22,018

 

64,470

 

64,423

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

2,520

 

3,210

 

7,845

 

10,286

 

Fed funds purchased

 

8

 

14

 

31

 

31

 

Securities sold under agreements to repurchase

 

68

 

89

 

199

 

257

 

Federal Home Loan Bank advances

 

368

 

622

 

1,093

 

1,703

 

Subordinated debentures

 

862

 

869

 

2,586

 

2,591

 

Total interest expense

 

3,826

 

4,804

 

11,754

 

14,868

 

Net interest income

 

17,790

 

17,214

 

52,716

 

49,555

 

Provision for loan losses

 

4,100

 

2,695

 

9,500

 

7,774

 

Net interest income after provision for loan losses

 

13,690

 

14,519

 

43,216

 

41,781

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Investment management and trust services

 

3,347

 

3,045

 

10,545

 

9,538

 

Service charges on deposit accounts

 

2,167

 

2,250

 

6,125

 

6,435

 

Bankcard transaction revenue

 

945

 

837

 

2,782

 

2,451

 

Gains on sales of mortgage loans held for sale

 

574

 

601

 

1,397

 

1,431

 

Gains on sales of securities available for sale

 

 

159

 

 

159

 

Brokerage commissions and fees

 

570

 

525

 

1,613

 

1,484

 

Bank owned life insurance income

 

257

 

251

 

761

 

742

 

Other

 

(2

)

594

 

792

 

1,921

 

Total non-interest income

 

7,858

 

8,262

 

24,015

 

24,161

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

7,528

 

8,197

 

24,576

 

24,605

 

Net occupancy expense

 

1,314

 

1,136

 

3,901

 

3,708

 

Data processing expense

 

1,283

 

1,119

 

3,766

 

3,578

 

Furniture and equipment expense

 

306

 

316

 

998

 

951

 

FDIC insurance expense

 

339

 

498

 

1,299

 

1,500

 

Other

 

2,532

 

2,643

 

8,314

 

7,706

 

Total non-interest expenses

 

13,302

 

13,909

 

42,854

 

42,048

 

Income before income taxes

 

8,246

 

8,872

 

24,377

 

23,894

 

Income tax expense

 

2,472

 

2,507

 

7,115

 

6,992

 

Net income

 

5,774

 

6,365

 

17,262

 

16,902

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.42

 

$

0.46

 

$

1.25

 

$

1.24

 

Diluted

 

$

0.42

 

$

0.46

 

$

1.25

 

$

1.23

 

Average common shares:

 

 

 

 

 

 

 

 

 

Basic

 

13,799

 

13,701

 

13,778

 

13,679

 

Diluted

 

13,838

 

13,807

 

13,844

 

13,770

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended September 30, 2011 and 2010

(In thousands)

 

 

 

2011

 

2010

 

Operating activities:

 

 

 

 

 

Net income

 

$

17,262

 

$

16,902

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

9,500

 

7,774

 

Depreciation, amortization and accretion, net

 

2,943

 

2,383

 

Deferred income tax benefit

 

(1,181

)

(1,975

)

Gain on sale of securities available for sale

 

 

(159

)

Gain on sales of mortgage loans held for sale

 

(1,397

)

(1,431

)

Origination of mortgage loans held for sale

 

(76,270

)

(109,844

)

Proceeds from sale of mortgage loans held for sale

 

79,042

 

114,606

 

Bank owned life insurance income

 

(761

)

(742

)

Decrease (increase) in value of private investment fund

 

703

 

(347

)

Loss on the disposal of equipment

 

382

 

2

 

Loss on the sale of other real estate

 

37

 

24

 

Stock compensation expense

 

869

 

704

 

Excess tax benefits from share-based compensation arrangements

 

(87

)

(89

)

Decrease (increase) in accrued interest receivable and other assets

 

3,337

 

(7,135

)

Decrease in accrued interest payable and other liabilities

 

(8,666

)

(1,609

)

Net cash provided by operating activities

 

25,713

 

19,064

 

Investing activities:

 

 

 

 

 

Purchases of securities available for sale

 

(249,429

)

(190,473

)

Proceeds from sale of securities available for sale

 

 

27,064

 

Proceeds from maturities of securities available for sale

 

211,106

 

137,623

 

Proceeds from maturities of securities held to maturity

 

20

 

11

 

Net increase in loans

 

(46,435

)

(61,750

)

Purchases of premises and equipment

 

(6,280

)

(4,640

)

Proceeds from disposal of premises and equipment

 

7

 

3

 

Proceeds from sale of foreclosed assets

 

5,953

 

1,111

 

Net cash used in investing activities

 

(85,058

)

(91,051

)

Financing activities:

 

 

 

 

 

Net increase in deposits

 

83,092

 

44,595

 

Net (decrease) increase in securities sold under agreements to repurchase and federal funds purchased

 

(2,281

)

13,343

 

Net decrease in other short-term borrowings

 

(733

)

(577

)

Proceeds from Federal Home Loan Bank advances

 

 

20,000

 

Repayments of Federal Home Loan Bank advances

 

(8

)

(8

)

Repayments of subordinated debentures

 

 

(30

)

Issuance of common stock for options and dividend reinvestment plan

 

474

 

518

 

Excess tax benefits from share-based compensation arrangements

 

87

 

89

 

Common stock repurchases

 

(167

)

(81

)

Cash dividends paid

 

(7,441

)

(6,964

)

Net cash provided by financing activities

 

73,023

 

70,885

 

Net increase (decrease) in cash and cash equivalents

 

13,678

 

(1,102

)

Cash and cash equivalents at beginning of period

 

41,655

 

32,424

 

Cash and cash equivalents at end of period

 

$

55,333

 

$

31,322

 

Supplemental cash flow information:

 

 

 

 

 

Income tax payments

 

$

2,599

 

$

6,355

 

Cash paid for interest

 

11,903

 

14,878

 

Supplemental non-cash activity:

 

 

 

 

 

Transfers from loans to other real estate owned

 

$

9,828

 

$

4,579

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



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S.Y. BANCORP, INC. AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2011 (Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Common stock

 

 

 

 

 

other

 

 

 

 

 

Number of

 

 

 

Additional

 

Retained

 

comprehensive

 

 

 

 

 

shares

 

Amount

 

paid-in capital

 

earnings

 

income

 

Total

 

Balance December 31, 2010

 

13,737

 

$

6,679

 

$

12,206

 

$

147,837

 

$

3,139

 

$

169,861

 

Net income

 

 

 

 

17,262

 

 

17,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accumulated other comprehensive income, net of tax

 

 

 

 

 

2,608

 

2,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

869

 

 

 

869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for stock options exercised and dividend reinvestment plan

 

52

 

172

 

794

 

 

 

966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for non-vested restricted stock

 

42

 

140

 

866

 

(1,006

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends, $0.54 per share

 

 

 

 

(7,441

)

 

(7,441

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased or cancelled

 

(30

)

(100

)

(614

)

142

 

 

(572

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance September 30, 2011

 

13,801

 

$

6,891

 

$

14,121

 

$

156,794

 

$

5,747

 

$

183,553

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5


 

 


Table of Contents

 

S.Y. BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2011 and 2010 (Unaudited)

(In thousands)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

2011

 

2010

 

2011

 

2010

 

Net income

 

$

5,774

 

$

6,365

 

$

17,262

 

$

16,902

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Unrealized gains on securities available for sale:

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period (net of tax of $555, $682, $1,404 and $1,590, respectively)

 

1,031

 

1,266

 

2,608

 

2,953

 

Reclassification adjustment for securities gains realized in income (net of tax of $0, ($56), $0, and ($56), respectively)

 

 

(103

)

 

(103

)

Other comprehensive income

 

1,031

 

1,163

 

2,608

 

2,850

 

Comprehensive income

 

$

6,805

 

$

7,528

 

$

19,870

 

$

19,752

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



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S.Y. BANCORP, INC. AND SUBSIDIARY

 

(1)                     Summary of Significant Accounting Policies

 

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles (US GAAP) for complete financial statements.  The consolidated financial statements of S.Y. Bancorp, Inc. (“Bancorp”) and its subsidiary reflect all adjustments (consisting only of adjustments of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods.

 

The consolidated financial statements include the accounts of S.Y. Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”).  S.Y. Bancorp Capital Trust II is a Delaware statutory trust that is a wholly-owned unconsolidated finance subsidiary of S.Y. Bancorp, Inc. Significant intercompany transactions and accounts have been eliminated in consolidation.

 

A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2010 included in S.Y. Bancorp, Inc.’s Annual Report on Form 10-K.  Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.

 

Interim results for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results for the entire year.

 

Critical Accounting Policies

 

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

 

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

 

Recently Adopted Accounting Pronouncement

 

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring as a result of stakeholders questioning whether additional guidance or clarification was needed to assist creditors with determining whether a modification is a Troubled Debt Restructuring (TDR). The final standard does not change the long-standing guidance that a restructuring of

 

7



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a debt constitutes a TDR “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.” In other words, the creditor must conclude that both the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. For the purposes of those two tests, the final ASU provides clarifications regarding the debtor’s access to funds at current market rates, assessing the debtor’s financial difficulties, and payment delays.  The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  The adoption of ASU 2011-02 did not result in additional loans being identified as TDR.

 

(2)                     Securities

 

The amortized cost, unrealized gains and losses, and fair value of securities available for sale follow:

 

September 30, 2011

 

Amortized

 

Unrealized

 

 

 

Securities available for sale

 

Cost

 

Gains

 

Losses

 

Fair Value

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

75,001

 

$

 

$

1

 

$

75,000

 

Government sponsored enterprise obligations

 

51,379

 

3,046

 

 

54,425

 

Mortgage-backed securities

 

85,568

 

3,794

 

 

89,362

 

Obligations of states and political subdivisions

 

64,541

 

2,420

 

14

 

66,947

 

Trust preferred securities of other financial institutions

 

1,250

 

1

 

 

1,251

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

277,739

 

$

9,261

 

$

15

 

$

286,985

 

 

December 31, 2010

 

Amortized

 

Unrealized

 

 

 

Securities available for sale

 

Cost

 

Gains

 

Losses

 

Fair Value

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government sponsored enterprise obligations

 

$

111,802

 

$

2,737

 

$

 

$

114,539

 

Mortgage-backed securities

 

58,616

 

2,348

 

216

 

60,748

 

Obligations of states and political subdivisions

 

68,429

 

777

 

417

 

68,789

 

Trust preferred securities of other financial institutions

 

1,250

 

6

 

 

1,256

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

$

240,097

 

$

5,868

 

$

633

 

$

245,332

 

 

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Table of Contents

 

The investment portfolio includes a significant level of obligations of states and political subdivisions.  The issuers of the bonds are generally school districts or essential-service public works projects.  The bonds are concentrated in Kentucky, with a small percentage of the portfolio in Indiana and Ohio.  Each of these securities has a rating of A or better by a recognized bond rating agency.

 

At December 31, 2010, Bancorp had mortgage-backed securities classified as held to maturity.  These securities, with an amortized cost of $20,000, had a fair value of $22,000.  There are no securities held to maturity as of September 30, 2011.

 

In addition to the available for sale portfolio, investment securities held by Bancorp include certain securities which are not readily marketable and are carried at cost. This category includes holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock which are required as part of the condition for borrowing availability from the FHLB and are classified as restricted securities.  See Note 5 for information relating to FHLB borrowings.  Other securities consist of a Community Reinvestment Act (CRA) investment which matures in 2014, and is fully collateralized with a government agency security of similar duration.

 

A summary of the available for sale investment securities by maturity groupings as of September 30, 2011 is shown below. Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations.  The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, and GNMA.  These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.

 

Securities available for sale

 

Amortized Cost

 

Fair Value

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Due within 1 year

 

85,546

 

85,654

 

Due after 1 but within 5 years

 

68,819

 

71,426

 

Due after 5 but within 10 years

 

32,461

 

34,964

 

Due after 10 years

 

5,345

 

5,579

 

Mortgage-backed securities

 

85,568

 

89,362

 

Total securities available for sale

 

$

277,739

 

$

286,985

 

 

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Table of Contents

 

Securities with unrealized losses not recognized in income at September 30, 2011 and December 31, 2010 are as follows:

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(In thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

75,000

 

$

1

 

$

 

$

 

$

75,000

 

1

 

Mortgage-backed securities

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

315

 

1

 

1,028

 

13

 

1,343

 

14

 

Total temporarily impaired securities

 

$

75,315

 

$

2

 

$

1,028

 

$

13

 

$

76,343

 

$

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

9,620

 

$

216

 

$

 

$

 

$

9,620

 

$

216

 

Obligations of states and political subdivisions

 

31,444

 

417

 

 

 

31,444

 

417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

 

$

41,064

 

$

633

 

$

 

$

 

$

41,064

 

$

633

 

 

Unrealized losses on Bancorp’s investment securities portfolio have not been recognized in income because the securities are of high credit quality, and the decline in fair values is largely due to changes in the prevailing interest rate environment since the purchase date.  The fair value is expected to recover as the securities reach their maturity date and/or the interest rate environment returns to conditions similar to when the securities were purchased.  These investments consist of 3 and 49 separate investment positions as of September 30, 2011 and December 31, 2010, respectively, that are not considered other-than-temporarily impaired.  Based on this information, Bancorp has not recorded other-than-temporary losses on any securities held at September 30, 2011.

 

Management evaluates the impairment of securities on an ongoing basis, considering various factors including issuer financial condition, agency rating, payment prospects, impairment duration and general industry condition.  As of September 30, 2011, Bancorp had one security which had been impaired for 12 months or longer, and one trust preferred security with a credit rating below investment grade — Caa1 by Moody’s Investor Service.  This security had an amortized cost and carrying value of $1,000,000.  Because management does not intend to sell the investments, and it is not likely that Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Bancorp does not consider these securities to be other-than-temporarily impaired at September 30, 2011.

 

Under Kentucky law, customer cash balances in investment management and trust accounts may be retained as deposits in the Bank.  Kentucky law requires these deposit accounts above the $250,000 per account protection provided by the FDIC to be backed by some form of collateral.  At September 30, 2011 Bancorp pledged securities totaling $24.8 million to collateralize these accounts beyond the FDIC protection.

 

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(3)                     Stock-Based Compensation

 

The fair value of all new and modified awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period. Forfeiture estimates are based on historical experience.

 

Bancorp currently has one stock-based compensation plan.  Initially, in the 2005 Stock Incentive Plan, there were 735,000 shares of common stock reserved for issuance of stock based awards.  In 2010, shareholders approved a proposal to amend the 2005 Stock Incentive Plan to reserve an additional 700,000 shares of common stock for issuance under the plan. As of September 30, 2011, there were 692,929 shares available for future awards. Bancorp’s 1995 Stock Incentive Plan expired in 2005; however, options granted under this plan expire as late as 2015.

 

Options and stock appreciation rights (SARs) granted generally have been subject to a vesting schedule of 20% per year.  Restricted shares generally vest over three to five years.   All awards under both plans have been granted at an exercise price equal to the market value of common stock at the time of grant; options and SARs expire ten years after the grant date unless forfeited due to employment termination.

 

In April 2011, the Board of Directors of Bancorp approved an amendment to the 2005 Stock Incentive Plan to authorize restricted stock units (RSUs) as a type of award that the Company may grant pursuant to the Plan. The RSU awards entitle those officers to issuance of one share of common stock for each vested RSU shortly after expiration of a three-year performance period, provided certain goals are achieved.  Executives do not have voting rights and do not receive dividends or other distributions paid on stock related to RSUs, until that stock is actually issued.

 

Bancorp has recognized stock-based compensation expense, within salaries and employee benefits in the consolidated statements of income, as follows:

 

 

 

For three months ended

 

For nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Stock-based compensation expense before income taxes

 

$

305,000

 

$

249,000

 

$

869,000

 

$

704,000

 

Deferred tax benefit

 

107,000

 

87,000

 

304,000

 

246,000

 

Reduction of net income

 

$

198,000

 

$

162,000

 

$

565,000

 

$

458,000

 

 

Bancorp expects to record an additional $321,000 of stock-based compensation expense in 2011 for equity grants outstanding as of September 30, 2011.  As of September 30, 2011, Bancorp has $3,070,000 of unrecognized stock-based compensation expense that will be recorded as compensation expense over the next five years as awards vest.  Bancorp received cash of $462,000 and $507,000 from the exercise of options during the first nine months of 2011 and 2010, respectively.

 

The fair value of Bancorp’s stock options and SARs is estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options.  This model requires the input of subjective assumptions, changes to which can materially affect the fair value estimate.  The fair value of restricted shares is determined by Bancorp’s closing stock price on the date of grant. The fair value of restricted stock units is determined by Bancorp’s closing stock price on the date of the award, less the present value of dividends expected to be paid during the performance period.

 

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Table of Contents

 

The following assumptions were used in SAR/option valuations at the grant date in each year:

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Dividend yield

 

2.48

%

2.18

%

Expected volatility

 

22.64

 

23.87

 

Risk free interest rate

 

2.90

 

3.57

 

Forfeitures

 

6.07

 

5.96

 

Expected life of options and SARs (in years)

 

7.5

 

7.6

 

 

The dividend yield and expected volatility are based on historical information corresponding to the expected life of options and SARs granted.  The expected volatility is the volatility of the underlying shares for the expected term on a monthly basis.  The risk free interest rate is the implied yield currently available on U. S. Treasury issues with a remaining term equal to the expected life of the options.

 

All outstanding options and SARs have a 10-year contractual term from the date of grant.  The expected life of options is based on actual experience of past like-term awards.  Bancorp evaluated historical exercise and post-vesting termination behavior when determining the expected life of options and SARs.

 

A summary of stock option and SARs activity and related information for the nine months ended September 30, 2011 follows.  The number of options and SARs and aggregate intrinsic value are stated in thousands.

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Aggregate

 

Average

 

Remaining

 

 

 

Options

 

 

 

Exercise

 

Intrinsic

 

Fair

 

Contractual

 

 

 

and SARs

 

Exercise Price

 

Price

 

Value (1)

 

Value

 

Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable

 

710

 

$

16.00-26.83

 

$

22.03

 

$

2,007

 

$

4.91

 

4.15

 

Unvested

 

273

 

21.03-26.83

 

22.85

 

552

 

5.36

 

7.72

 

Total outstanding

 

983

 

16.00-26.83

 

22.26

 

2,559

 

5.03

 

5.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

67

 

23.76-24.87

 

23.78

 

 

5.04

 

 

 

Exercised

 

(52

)

16.00-23.37

 

16.90

 

343

 

3.47

 

 

 

Forfeited

 

(28

)

18.05-26.83

 

21.79

 

1

 

4.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and exercisable

 

737

 

16.00-26.83

 

22.62

 

100

 

5.09

 

3.79

 

Unvested

 

233

 

21.03-26.83

 

22.80

 

 

5.22

 

7.97

 

Total outstanding

 

970

 

16.00-26.83

 

22.66

 

$

100

 

5.12

 

4.79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested during year

 

95

 

21.03-26.83

 

23.58

 

$

 

5.48

 

 

 

 


(1)  Intrinsic value for stock options is defined as the amount by which the current market price of the underlying stock exceeds the exercise price.

 

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Table of Contents

 

In the first quarter of 2011, Bancorp granted 66,579 SARs at the weighted average current market price of $23.78 and a Black-Scholes fair value of $5.04.  There were no SARs granted in the second or third quarters.  In the first two quarters of 2011, Bancorp granted 41,991 shares of restricted common stock at the weighted average current market price of $23.96.  There were no restricted stock grants in the third quarter of 2011.  Also in the second quarter of 2011, Bancorp awarded RSUs with a fair value of $21.99 to executive officers of the Bank, the three-year performance period for which began January 1, 2011.  Bancorp believes the most likely vesting of these RSUs will be 20,228 shares of common stock.

 

(4)                     Loans

 

The composition of loans by primary loan classification follows:

 

(In thousands)

 

September 30, 2011

 

December 31, 2010

 

Commercial and industrial

 

$

381,644

 

$

343,956

 

Real estate mortgage:

 

 

 

 

 

Commercial investment

 

362,498

 

362,904

 

Owner occupied commercial

 

328,893

 

316,291

 

1-4 family residential

 

158,594

 

157,983

 

Home equity - first lien

 

38,766

 

39,449

 

Home equity - junior lien

 

81,143

 

91,813

 

Subtotal: Real estate mortgage

 

969,894

 

968,440

 

Construction and development

 

152,891

 

159,482

 

Consumer

 

34,626

 

36,547

 

 

 

 

 

 

 

Total loans

 

$

1,539,055

 

$

1,508,425

 

 

An analysis of the changes in the allowance for loan losses for the nine months ended September 30, 2011 and 2010 follows:

 

(in thousands)

 

2011

 

2010

 

Beginning balance January 1,

 

$

25,543

 

$

20,000

 

Provision for loan losses

 

9,500

 

7,774

 

Loans charged off

 

(6,463

)

(3,992

)

Recoveries

 

486

 

651

 

Ending balance September 30,

 

$

29,066

 

$

24,433

 

 

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Table of Contents

 

The following table presents the balance in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment method as of September 30, 2011 and December 31, 2010.

 

 

 

Type of Loan

 

 

 

 

 

September 30, 2011

 

Commercial

 

Construction

 

Real estate

 

 

 

 

 

 

 

(in thousands)

 

and industrial

 

and development

 

mortgage

 

Consumer

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

$

381,644

 

$

152,891

 

$

969,894

 

$

34,626

 

 

 

$

1,539,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: individually evaluated for impairment

 

$

7,122

 

$

5,479

 

$

13,907

 

$

96

 

 

 

$

26,604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: collectively evaluated for impairment

 

$

374,522

 

$

147,412

 

$

955,987

 

$

34,530

 

 

 

$

1,512,451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2010

 

$

2,796

 

$

2,280

 

$

12,272

 

$

623

 

$

7,572

 

$

25,543

 

Provision

 

6,299

 

2,830

 

2,518

 

110

 

(2,257

)

9,500

 

Charge-offs

 

(1,002

)

(1,225

)

(3,731

)

(505

)

 

(6,463

)

Recoveries

 

52

 

 

118

 

316

 

 

486

 

Ending balance September 30, 2011

 

$

8,145

 

$

3,885

 

$

11,177

 

$

544

 

$

5,315

 

$

29,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: individually evaluated for impairment

 

$

1,550

 

$

 

$

2,171

 

$

 

 

 

$

3,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: collectively evaluated for impairment

 

$

6,595

 

$

3,885

 

$

9,006

 

$

544

 

$

5,315

 

$

25,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

$

 

$

 

 

14



Table of Contents

 

 

 

Type of Loan

 

 

 

 

 

December 31, 2010

 

Commercial

 

Construction

 

Real estate

 

 

 

 

 

 

 

(in thousands)

 

and industrial

 

and development

 

mortgage

 

Consumer

 

Unallocated

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

$

343,956

 

$

159,482

 

$

968,440

 

$

36,547

 

 

 

$

1,508,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: individually evaluated for impairment

 

$

520

 

$

700

 

$

15,955

 

$

95

 

 

 

$

17,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: collectively evaluated for impairment

 

$

343,436

 

$

158,782

 

$

952,485

 

$

36,452

 

 

 

$

1,491,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2009

 

$

4,091

 

$

1,518

 

$

6,513

 

$

947

 

$

6,931

 

$

20,000

 

Provision

 

8

 

2,947

 

8,046

 

(173

)

641

 

11,469

 

Charge-offs

 

(1,418

)

(2,211

)

(2,450

)

(687

)

 

(6,766

)

Recoveries

 

115

 

26

 

163

 

536

 

 

840

 

Ending balance December 31, 2010

 

$

2,796

 

$

2,280

 

$

12,272

 

$

623

 

$

7,572

 

$

25,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: individually evaluated for impairment

 

$

90

 

$

 

$

1,724

 

$

 

 

 

$

1,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: collectively evaluated for impairment

 

$

2,706

 

$

2,280

 

$

10,548

 

$

623

 

$

7,572

 

$

23,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: loans acquired with deteriorated credit quality

 

$

 

$

 

$

 

$

 

$

 

$

 

 

Information regarding impaired loans follows (in thousands):

 

 

 

September 30, 2011

 

December 31, 2010

 

Principal balance of impaired loans

 

$

26,604

 

$

17,270

 

Impaired loans with a valuation allowance

 

15,248

 

7,335

 

Amount of valuation allowance

 

3,721

 

1,814

 

Impaired loans with no valuation allowance

 

11,356

 

9,935

 

Average balance of impaired loans for the period

 

18,330

 

13,212

 

 

Management uses the following classes of loans when assessing and monitoring the risk and performance of the loan portfolio:

 

·                  Commercial and industrial

·                  Real estate mortgage

·                  Construction and development

·                  Consumer

 

15



Table of Contents

 

The following table presents loans individually evaluated for impairment as of September 30, 2011 and December 31, 2010.

 

 

 

 

 

Unpaid

 

 

 

September 30, 2011

 

Recorded

 

principal

 

Related

 

(in thousands)

 

investment

 

balance

 

allowance

 

 

 

 

 

 

 

 

 

Loans with no related allowance recorded

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,770

 

$

2,770

 

 

 

Real estate mortgage

 

3,011

 

3,237

 

 

 

Construction and development

 

5,479

 

5,479

 

 

 

Consumer

 

96

 

96

 

 

 

Subtotal

 

11,356

 

11,582

 

 

 

 

 

 

 

 

 

 

 

Loans with an allowance recorded

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,352

 

$

4,352

 

$

1,550

 

Real estate mortgage

 

10,896

 

12,896

 

2,171

 

Construction and development

 

 

 

 

Consumer

 

 

 

 

Subtotal

 

15,248

 

17,248

 

3,721

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Commercial and industrial

 

$

7,122

 

$

7,122

 

$

1,550

 

Real estate mortgage

 

$

13,907

 

$

16,133

 

$

2,171

 

Construction and development

 

$

5,479

 

$

5,479

 

$

 

Consumer

 

$

96

 

$

96

 

$

 

Total

 

$

26,604

 

$

28,830

 

$

3,721

 

 

16



Table of Contents

 

 

 

 

 

Unpaid

 

 

 

December 31, 2010

 

Recorded

 

principal

 

Related

 

(in thousands)

 

investment

 

balance

 

allowance

 

 

 

 

 

 

 

 

 

Loans with no related allowance recorded

 

 

 

 

 

 

 

Commercial and industrial

 

$

420

 

$

1,982

 

 

 

Real estate mortgage

 

8,720

 

9,455

 

 

 

Construction and development

 

700

 

700

 

 

 

Consumer

 

95

 

140

 

 

 

Subtotal

 

9,935

 

12,277

 

 

 

 

 

 

 

 

 

 

 

Loans with an allowance recorded

 

 

 

 

 

 

 

Commercial and industrial

 

$

100

 

$

292

 

$

90

 

Real estate mortgage

 

7,235

 

7,235

 

1,724

 

Construction and development

 

 

 

 

Consumer

 

 

 

 

Subtotal

 

7,335

 

7,527

 

1,814

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Commercial and industrial

 

$

520

 

$

2,274

 

$

90

 

Real estate mortgage

 

$

15,955

 

$

16,690

 

$

1,724

 

Construction and development

 

$

700

 

$

700

 

$

 

Consumer

 

$

95

 

$

140

 

$

 

Total

 

$

17,270

 

$

19,804

 

$

1,814

 

 

Recorded investment reflects partial charge-offs which may have occurred over the life of the loans.

 

Impaired loans include non-accrual loans and loans accounted for as troubled debt restructuring. Non-performing loans include the balance of impaired loans plus any loans over 90 days past due and still accruing interest.

 

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Table of Contents

 

The following table presents the recorded investment in non-accrual loans as of September 30, 2011 and December 31, 2010.

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,191

 

$

2,328

 

Construction and development

 

5,479

 

4,589

 

Real estate mortgage

 

13,907

 

7,194

 

Consumer

 

96

 

277

 

 

 

 

 

 

 

Total

 

$

22,673

 

$

14,388

 

 

Included in non-performing loans are loans accounted for as troubled debt restructurings (TDR) which continue to accrue interest. The following table presents the recorded investment in loans account