UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2007
OR
o |
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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 |
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61-1137529 |
(State or other
jurisdiction of |
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(I.R.S. Employer |
1040 East Main Street, Louisville, Kentucky 40206
(Address of principal executive offices including zip code)
(502) 582-2571
(Registrants 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Stock, no
par value 14,260,461
Shares issued and outstanding at August 1, 2007
S.Y. BANCORP, INC. AND SUBSIDIARY
Index
PART I FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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The following consolidated financial statements of S.Y. Bancorp, Inc. and Subsidiary, Stock Yards Bank & Trust Company, are submitted herewith: |
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Unaudited Condensed Consolidated Balance Sheets |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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S.Y. BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
(In thousands, except share data)
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June 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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Assets |
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Cash and due from banks |
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$ |
42,910 |
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$ |
44,007 |
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Federal funds sold |
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10,645 |
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15,671 |
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Mortgage loans held for sale |
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4,965 |
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4,035 |
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Securities available for sale (amortized cost of $129,119 in 2007 and $146,859 in 2006) |
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127,745 |
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145,695 |
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Securities held to maturity (approximate fair value of $2,306 in 2007 and $3,159 in 2006) |
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2,306 |
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3,148 |
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Federal Home Loan Bank stock |
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3,797 |
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3,591 |
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Loans |
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1,162,906 |
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1,148,954 |
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Less allowance for loan losses |
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12,065 |
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12,203 |
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Net loans |
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1,150,841 |
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1,136,751 |
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Premises and equipment, net |
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24,650 |
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24,823 |
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Accrued interest receivable and other assets |
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57,440 |
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48,600 |
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Total assets |
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$ |
1,425,299 |
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$ |
1,426,321 |
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Liabilities and Stockholders Equity |
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Deposits: |
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Non-interest bearing |
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$ |
184,000 |
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$ |
179,657 |
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Interest bearing |
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901,316 |
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923,585 |
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Total deposits |
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1,085,316 |
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1,103,242 |
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Securities sold under agreements to repurchase and federal funds purchased |
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87,868 |
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84,313 |
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Other short-term borrowings |
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1,204 |
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734 |
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Accrued interest payable and other liabilities |
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38,933 |
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40,468 |
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Federal Home Loan Bank advances |
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70,000 |
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60,000 |
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Subordinated debentures |
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90 |
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120 |
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Total liabilities |
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1,283,411 |
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1,288,877 |
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Stockholders equity: |
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Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding |
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Common stock, no par value. Authorized 20,000,000 shares; issued and outstanding 14,297,604 and 14,400,420 shares in 2007 and 2006, respectively |
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8,538 |
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8,878 |
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Additional paid-in capital |
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25,149 |
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27,703 |
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Retained earnings |
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109,353 |
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101,876 |
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Accumulated other comprehensive loss |
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(1,152 |
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(1,013 |
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Total stockholders equity |
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141,888 |
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137,444 |
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Total liabilities and stockholders equity |
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$ |
1,425,299 |
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$ |
1,426,321 |
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See accompanying notes to unaudited condensed consolidated financial statements.
2
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Income
For the three and six months ended June 30, 2007 and 2006
(In thousands, except per share data)
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For three months ended |
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For six month ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Interest income: |
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Loans |
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$ |
21,243 |
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$ |
19,570 |
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$ |
41,874 |
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$ |
38,027 |
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Federal funds sold |
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151 |
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145 |
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588 |
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565 |
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Mortgage loans held for sale |
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77 |
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51 |
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124 |
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111 |
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Securities taxable |
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1,069 |
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1,155 |
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2,276 |
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2,250 |
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Securities tax-exempt |
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275 |
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323 |
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559 |
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618 |
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Total interest income |
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22,815 |
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21,244 |
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45,421 |
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41,571 |
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Interest expense: |
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Deposits |
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7,777 |
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6,494 |
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15,685 |
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12,565 |
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Securities sold under agreements to repurchase and federal funds purchased |
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720 |
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517 |
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1,352 |
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986 |
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Other short-term borrowings |
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6 |
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8 |
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6 |
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18 |
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Federal Home Loan Bank advances |
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732 |
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309 |
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1,382 |
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647 |
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Subordinated debentures |
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1 |
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466 |
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3 |
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932 |
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Total interest expense |
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9,236 |
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7,794 |
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18,428 |
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15,148 |
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Net interest income |
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13,579 |
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13,450 |
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26,993 |
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26,423 |
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Provision for loan losses |
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460 |
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600 |
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1,240 |
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950 |
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Net interest income after provision for loan losses |
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13,119 |
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12,850 |
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25,753 |
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25,473 |
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Non-interest income: |
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Investment management and trust services |
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3,336 |
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2,931 |
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6,533 |
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5,718 |
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Service charges on deposit accounts |
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2,204 |
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2,279 |
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4,222 |
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4,408 |
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Bankcard transaction revenue |
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590 |
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517 |
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1,132 |
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986 |
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Gains on sales of mortgage loans held for sale |
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391 |
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302 |
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647 |
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607 |
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Gains on sales of securities available for sale |
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Brokerage commissions and fees |
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452 |
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574 |
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945 |
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1,099 |
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Other |
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751 |
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626 |
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1,401 |
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1,324 |
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Total non-interest income |
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7,724 |
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7,229 |
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14,880 |
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14,142 |
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Non-interest expenses: |
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Salaries and employee benefits |
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6,632 |
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6,492 |
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13,239 |
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13,444 |
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Net occupancy expense |
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930 |
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847 |
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1,820 |
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1,709 |
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Data processing expense |
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1,051 |
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899 |
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2,066 |
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1,890 |
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Furniture and equipment expense |
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290 |
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298 |
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582 |
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603 |
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State bank taxes |
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311 |
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261 |
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489 |
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644 |
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Other |
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2,270 |
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2,481 |
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4,662 |
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4,766 |
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Total non-interest expenses |
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11,484 |
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11,278 |
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22,858 |
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23,056 |
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Income before income taxes |
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9,359 |
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8,801 |
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17,775 |
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16,559 |
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Income tax expense |
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3,062 |
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2,933 |
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5,774 |
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5,371 |
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Net income |
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$ |
6,297 |
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$ |
5,868 |
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$ |
12,001 |
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$ |
11,188 |
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Net income per share: |
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Basic |
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$ |
0.44 |
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$ |
0.41 |
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$ |
0.84 |
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$ |
0.77 |
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Diluted |
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0.43 |
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0.40 |
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0.82 |
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0.76 |
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Average common shares: |
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Basic |
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14,325 |
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14,484 |
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14,357 |
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14,494 |
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Diluted |
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14,536 |
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14,752 |
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14,588 |
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14,750 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2007 and 2006
(In thousands)
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2007 |
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2006 |
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Operating activities: |
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Net income |
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$ |
12,001 |
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$ |
11,188 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses |
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1,240 |
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950 |
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Depreciation, amortization and accretion, net |
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1,345 |
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1,534 |
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Provision for deferred income taxes |
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(305 |
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(316 |
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Gain on sales of securities available for sale |
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Gains on sales of mortgage loans held for sale |
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(647 |
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(607 |
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Origination of mortgage loans held for sale |
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(41,350 |
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(46,086 |
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Proceeds from sale of mortgage loans held for sale |
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41,067 |
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49,656 |
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Loss on the sale of premises and equipment |
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13 |
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Bank owned life insurance income |
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482 |
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443 |
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Loss (gain) on the sale of other real estate |
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30 |
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(7 |
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Stock compensation expense |
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242 |
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384 |
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Excess tax benefits from share-based compensation arrangements |
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(17 |
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(117 |
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Increase in accrued interest receivable and other assets |
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(12,510 |
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(3,102 |
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Decrease in accrued interest payable and other liabilities |
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(1,342 |
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(5,024 |
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Net cash provided by operating activities |
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236 |
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8,909 |
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Investing activities: |
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Purchases of securities available for sale |
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(23,346 |
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(38,566 |
) |
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Proceeds from maturities of securities available for sale |
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40,886 |
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67,662 |
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Proceeds from maturities of securities held to maturity |
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841 |
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540 |
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Net increase in loans |
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(14,050 |
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(32,461 |
) |
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Purchases of premises and equipment |
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(1,177 |
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(1,314 |
) |
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Proceeds from sales of other real estate |
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1,949 |
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163 |
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Net cash provided by (used in) investing activities |
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5,103 |
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(3,976 |
) |
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Financing activities: |
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Net (decrease) increase in deposits |
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(17,926 |
) |
28,168 |
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Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased |
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3,555 |
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(6,450 |
) |
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Net increase (decrease) in other short-term borrowings |
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470 |
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(929 |
) |
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Proceeds of Federal Home Loan Bank advances |
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Proceeds from Federal Home Loan Bank advances |
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20,000 |
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Repayments of Federal Home Loan Bank advances |
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(10,000 |
) |
(10,000 |
) |
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Repayments of subordinated debentures |
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(30 |
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(30 |
) |
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Issuance of common stock for options and dividend reinvestment plan |
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813 |
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1,267 |
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Excess tax benefits from share-based compensation arrangements |
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17 |
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117 |
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Common stock repurchases |
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(4,040 |
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(3,798 |
) |
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Cash dividends paid |
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(4,321 |
) |
(3,754 |
) |
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Net cash (used) in provided by financing activities |
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(11,462 |
) |
4,591 |
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Net (decrease) increase in cash and cash equivalents |
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(6,123 |
) |
9,524 |
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Cash and cash equivalents at beginning of period |
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59,678 |
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44,039 |
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Cash and cash equivalents at end of period |
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$ |
53,555 |
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$ |
53,563 |
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Supplemental cash flow information: |
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Income tax payments |
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$ |
4,565 |
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$ |
4,685 |
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Cash paid for interest |
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18,237 |
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15,230 |
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Supplemental non-cash activity: |
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Transfers from loans to other real estate owned |
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$ |
1,280 |
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$ |
588 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity
For the six months ended June 30, 2007
(In thousands, except per share data)
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Accumulated |
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Com mon stock |
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other |
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Number of |
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Additional |
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Retained |
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comprehensive |
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shares |
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Amount |
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Paid in Capital |
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earnings |
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loss |
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Total |
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Balance December 31, 2006 |
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14,400 |
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$ |
8,878 |
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$ |
27,703 |
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$ |
101,876 |
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$ |
(1,013 |
) |
$ |
137,444 |
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Net income |
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|
|
|
|
|
12,001 |
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12,001 |
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Change in accumulated other comprehensive loss, net of tax |
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(139 |
) |
(139 |
) |
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Stock compensation expense |
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|
|
242 |
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|
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|
242 |
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Stock issued for stock options exercised and dividend reinvestment plan |
|
55 |
|
185 |
|
645 |
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|
|
|
|
830 |
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Stock issued for non-vested restricted stock |
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3 |
|
9 |
|
65 |
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(74 |
) |
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Cash dividends, $0.31 per share |
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|
|
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|
|
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(4,450 |
) |
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|
(4,450 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
|||||
Shares repurchased |
|
(160 |
) |
(534 |
) |
(3,506 |
) |
|
|
|
|
(4,040 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance June 30, 2007 |
|
14,298 |
|
$ |
8,538 |
|
$ |
25,149 |
|
$ |
109,353 |
|
$ |
(1,152 |
) |
$ |
141,888 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Comprehensive Income
For the three and six months ended June 30, 2007 and 2006
(In thousands)
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
June 30 |
|
June 30 |
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Net income |
|
$ |
6,297 |
|
$ |
5,868 |
|
$ |
12,001 |
|
$ |
11,188 |
|
Other comprehensive gain (loss), net of tax: |
|
|
|
|
|
|
|
|
|
||||
Unrealized gains (losses) on securities available for sale - |
|
|
|
|
|
|
|
|
|
||||
Unrealized holding gains (losses) arising during the period (net of tax of ($188), ($332), ($75) and ($625), respectively) |
|
(350 |
) |
(617 |
) |
(139 |
) |
(1,160 |
) |
||||
Other comprehensive income (loss) |
|
(350 |
) |
(617 |
) |
(139 |
) |
(1,160 |
) |
||||
Comprehensive income |
|
$ |
5,947 |
|
$ |
5,251 |
|
$ |
11,862 |
|
$ |
10,028 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
6
S.Y. BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The consolidated financial statements of S.Y. Bancorp, Inc. (Bancorp) and its subsidiary reflect all adjustments (consisting only of adjustments of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods.
The consolidated financial statements include the accounts of S.Y. Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (Bank). 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, 2006 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 six month periods ended June 30, 2007 are not necessarily indicative of the results for the entire year.
(a) Critical Accounting Policies
Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of Bancorps 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 managements 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 Bancorps 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 entitys financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in Bancorps 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 materially impact Bancorps financial position and its results from operations.
(b) Securities
Unrealized losses on Bancorps bond portfolio have not been recognized in income because the bonds are of high credit quality, management has the intent and the ability to hold for the foreseeable future, and the decline in fair values is largely due to an increase in prevailing interest rates since the
7
purchase date. The fair value is expected to recover as the securities reach their maturity date and/or interest rates decline. Bonds with unrecognized unrealized losses consist of 78 and 69 separate investment positions as of June 30, 2007 and December 31, 2006, respectively that are not considered other-than-temporarily impaired.
(c) Stock-Based Compensation
On January 1, 2006, Bancorp adopted the modified version of prospective application of Statement of Financial Standard No. 123 (R) Share-based Payment, (SFAS No. 123R). Under this method, the fair value of all new and modified awards granted subsequent to the date of adoption will be recognized as compensation expense, net of estimated forfeitures. Further, the fair value of any unvested awards at the date of adoption was recognized as compensation expense, net of estimated forfeitures.
Bancorps 1995 Stock Incentive Plan expired in 2005; however, options granted under this plan expire as late as 2015. The 2005 Stock Incentive Plan reserved 735,000 shares of common stock for issuance of stock based awards. As of June 30, 2007, there were 401,664 shares available for future awards. Options granted have been subject to a vesting schedule of 20% per year except for those granted to certain executive officers which vest six months after grant date. All outstanding options were granted at an exercise price equal to the market value of common stock at the time of grant and expire ten years after the grant date. Restricted shares granted to executive officers are subject to a vesting schedule of one-third per year. Certain other officers received grants vesting over two to five years.
The fair value of Bancorps stock options is estimated at the date of grant using the Black-Scholes option pricing model, an accepted and widely used 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. As a result of applying the provisions of SFAS No. 123R, Bancorp recognized for the six months ended June 30, 2007 and 2006, within salaries and employee benefits in the unaudited condensed consolidated income statements, stock-based compensation expense of $242,000 and $384,000 before income taxes and a deferred tax benefit of $85,000 and $134,000 resulting in a reduction of net income of $157,000 and $250,000, or $0.01 and $0.02, in both years, per basic and diluted shares, respectively. For the second quarter of 2007 and 2006, Bancorp recognized $189,000 and $210,000 of compensation expense before taxes, a deferred tax benefit of $66,000 and $74,000 and a reduction of net income of $123,000 and $136,000, or $0.01 and $0.01, in both years, per basic and diluted shares, respectively. Bancorp expects to record an additional $224,000 of compensation expense in 2007. As of June 30, 2007 Bancorp has $1,317,000 of unrecognized stock-based compensation expense. Related to stock options is $1,251,000, which will be recorded as compensation expense over the next 4.5 years, the weighted-average remaining life of these options. Related to restricted shares is $66,000, which will be recorded as stock compensation expense over the next 2.5 years, the weighted average remaining life of these restricted shares.
In accordance with the Financial Accounting Standards Board Staff Position SFAS No. 123R3, Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards, Bancorp has elected the alternative transition method to calculate the beginning balance of the pool of excess tax benefits. The beginning balance of excess tax benefits was calculated as the sum of all net increases in additional paid-in-capital related to tax benefits from stock-based employee compensation, less the incremental stock-based after-tax compensation costs that would have been
8
recognized if the fair value recognition provisions of SFAS No. 123 had been used to account for stock-based compensation costs.
SFAS No. 123R requires the cash flows resulting from excess tax deductions related to the compensation costs recognized for the share-based awards be classified as financing cash inflows. Cash flows provided by financing activities relating to excess tax benefits from share-based compensation arrangements increased by $17,000 and $117,000 and cash flows used in operating activities decreased by $17,000 and $117,000 for the six months ended June 30, 2007 and 2006, respectively. Bancorp received cash of $541,000 and $1,254,000 from the exercise of options during the first six months of 2007 and 2006, respectively.
Under SFAS No. 123R, Bancorp is required to reduce future stock-based compensation expense by estimated forfeitures at the grant date. These forfeiture estimates are based on historical experience.
The following assumptions were used in option valuations:
|
2007 |
|
2006 |
|
|
Dividend yield |
|
1.81 |
% |
1.63 |
% |
Expected volatility |
|
14.49 |
|
16.53 |
|
Risk free interest rate |
|
4.69 |
|
4.42 |
|
Forfeitures |
|
5.55 |
|
5.69 |
|
Expected life of options (in years) |
|
7.7 |
|
7.7 |
|
The expected life of options is based on actual experience of past like-term options. All outstanding options have a 10-year contractual term. Bancorp evaluated historical exercise and post-vesting termination behavior when determining the expected life of 7.7 years for options granted during the first six months of 2007 and 2006.
The dividend yield and expected volatility are based on historical information corresponding to the expected life of options granted. The expected volatility is the volatility of the underlying shares for the expected term on a quarterly 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.
A summary of stock option activity and related information for the six months ended June 30, 2007 follows. The number of options and aggregate intrinsic value are stated in thousands of dollars.
9
|
Options |
|
Exercise |
|
Weighted |
|
Aggregate |
|
Weighted |
|
Weighted |
|
|||||
|
|
(In thousands, except per share data) |
|
||||||||||||||
At December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested and exercisable |
|
818 |
|
$ |
6.90-$24.07 |
|
$ |
17.13 |
|
$ |
14,009 |
|
$ |
3.64 |
|
|
|
Unvested |
|
139 |
|
18.05-24.07 |
|
23.89 |
|
3,322 |
|
5.76 |
|
|
|
||||
Total outstanding |
|
957 |
|
6.90-24.07 |
|
18.12 |
|
17,331 |
|
3.95 |
|
|
|
||||
Granted |
|
153 |
|
24.02-26.83 |
|
26.81 |
|
4,090 |
|
6.14 |
|
|
|
||||
Exercised |
|
(55 |
) |
6.90-22.81 |
|
14.71 |
|
(599 |
) |
3.01 |
|
|
|
||||
Forfeited |
|
(8 |
) |
20.95-26.83 |
|
24.81 |
|
(205 |
) |
5.87 |
|
|
|
||||
At June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested and exercisable |
|
791 |
|
9.76-24.07 |
|
17.54 |
|
13,875 |
|
3.75 |
|
5.35 |
|
||||
Unvested |
|
256 |
|
18.05-26.83 |
|
25.61 |
|
6,544 |
|
5.98 |
|
9.17 |
|
||||
Total outstanding |
|
1,047 |
|
9.76-26.83 |
|
19.51 |
|
20,419 |
|
4.30 |
|
6.28 |
|
||||
Vested during quarter |
|
29 |
|
20.25-24.07 |
|
23.79 |
|
680 |
|
5.73 |
|
|
|
||||
On February 20, 2007, Bancorp granted 151,550 options to purchase common stock shares at the current market price of $26.83 and a fair value of $6.14. These options were awarded to employees and will primarily vest 20% per year over the next five years. Of these options, 36,500 were granted to certain executive officers and will vest six months from the date of grant. On May 15, 2007, Bancorp granted a new director 1,000 options to purchase common stock shares at the current market price of $24.02 and a fair value of $6.14. All options expire ten years from the date of grant.
Also, on February 20, 2007, Bancorp adopted a restricted stock program under the terms of the Companys 2005 Incentive Stock Plan. Bancorp granted 2,775 shares of common stock at the current market price of $26.83. Shares were granted to executive officers and will vest one-third per year over the next three years. Certain other officers received grants vesting over two to five years. As of June 30, 2007, none of these restricted shares had vested or canceled.
10
(2) Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses for the six months ended June 30 follows (in thousands):
|
2007 |
|
2006 |
|
|||
Beginning balance January 1, |
|
$ |
12,203 |
|
$ |
12,035 |
|
Provision for loan losses |
|
1,240 |
|
950 |
|
||
Loans charged off |
|
(1,843 |
) |
(956 |
) |
||
Recoveries |
|
465 |
|
363 |
|
||
Ending balance June 30, |
|
$ |
12,065 |
|
$ |
12,392 |
|
(3) Federal Home Loan Bank Advances
Under a blanket collateral agreement with the Federal Home Loan Bank of Cincinnati and secured by certain residential real estate loans, the Bank has outstanding borrowings of $70,000,000, at June 30, 2007, via three separate advances. The first two are fixed rate, non-callable advances of $20,000,000 and $30,000,000, which are due in October of 2008 and November of 2009, respectively. The third advance of $20,000,000 is a fixed rate advance eligible to be called by the FHLB after 12 months, in May of 2008, and then quarterly going forward until its maximum maturity in May of 2012. At June 30, 2007, the weighted average rate of these advances was 4.84%. Interest payments are due monthly, with principal due at maturity.
(4) Intangible Assets
Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets (SFAS No. 142), requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Annual evaluations have resulted in no charges for impairment. Bancorp currently has goodwill from the acquisition of a bank in southern Indiana in the amount of $682,000. This goodwill is assigned to the commercial banking segment of Bancorp.
(5) Defined Benefit Retirement Plan
The Bank sponsors an unfunded, non-qualified, defined benefit retirement plan for certain key officers. Benefits vest based on years of service. The Bank does not make contributions to this plan. Information about the components of the net periodic benefit cost of the defined benefit plan follows:
11
|
Three months ended June 30 |
|
|||||
|
|
2007 |
|
2006 |
|
||
Components of net periodic benefit cost: |
|
|
|
|
|
||
Service cost |
|
$ |
|
|
$ |
|
|
Interest cost |
|
28 |
|
29 |
|
||
Expected return on plan assets |
|
|
|
|
|
||
Amortization of prior service cost |
|
|
|
|
|
||
Amortization of the net loss |
|
7 |
|
7 |
|
||
Net periodic benefit cost |
|
$ |
35 |
|
$ |
36 |
|
|
Six months ended June 30 |
|
|||||
|
|
2007 |
|
2006 |
|
||
Components of net periodic benefit cost: |
|
|
|
|
|
||
Service cost |
|
$ |
|
|
$ |
|
|
Interest cost |
|
57 |
|
59 |
|
||
Expected return on plan assets |
|
|
|
|
|
||
Amortization of prior service cost |
|
|
|
|
|
||
Amortization of the net loss |
|
13 |
|
14 |
|
||
Net periodic benefit cost |
|
$ |
70 |
|
$ |
73 |
|
(6) Commitments to Extend Credit
As of June 30, 2007, Bancorp had various commitments outstanding that arose in the normal course of business, including standby letters of credit and commitments to extend credit, which are properly not reflected in the financial statements. In managements opinion, commitments to extend credit of $429,988,000, and standby letters of credit of $16,302,000, represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of June 30, 2007. Commitments to extend credit were $359,070,000, and letters of credit were $17,044,000, as of December 31, 2006. Bancorps exposure to credit loss in the event of nonperformance by the other party to these commitments is represented by the contractual amount of these instruments. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Commitments to extend credit are primarily made up of commercial lines of credit, construction and development loans and home equity credit lines. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on managements credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential properties and other real estate under development.
12
Standby letters of credit and financial guarantees written are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements.
(7) Preferred Stock
At Bancorps annual meeting of shareholders held in April 2003, the shareholders approved an amendment to the Articles of Incorporation to create a class of preferred stock and authorize 1,000,000 shares of this preferred stock with no par value. The relative rights, preferences and other terms of this stock or any series within the class will be determined by the Board of Directors prior to any issuance. Some of this preferred stock will be used in connection with a shareholders rights plan upon the occurrence of certain triggering events. None of this stock had been issued as of June 30, 2007.
(8) Net Income Per Share
The following table reflects, for the three and six month periods ended June 30, 2007 and 2006, net income (the numerator) and average shares outstanding (the denominator) for the basic and diluted net income per share computations (in thousands except per share data):
|
Three months ended |
|
Six months ended |
|
|||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
Net income, basic and diluted |
|
$ |
6,297 |
|
$ |
5,868 |
|
$ |
12,001 |
|
$ |
11,188 |
|
Average shares outstanding |
|
14,325 |
|
14,484 |
|
14,357 |
|
14,494 |
|
||||
Effect of dilutive securities |
|
211 |
|
268 |
|
231 |
|
256 |
|
||||
Average shares outstanding including dilutive securities |
|
14,536 |
|
14,752 |
|
14,588 |
|
14,750 |
|
||||
Net income per share, basic |
|
$ |
0.44 |
|
$ |
0.41 |
|
$ |
0.84 |
|
$ |
0.77 |
|
Net income per share, diluted |
|
$ |
0.43 |
|
$ |
0.40 |
|
$ |
0.82 |
|
$ |
0.76 |
|
(9) Segments
The Banks, and thus Bancorps, principal activities include commercial banking and investment management and trust. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes the Banks mortgage banking and brokerage activity. Investment management and trust provides wealth management services including investment management, trust and estate administration, and retirement plan services.
The financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Principally, all of the net assets of Bancorp are involved in the commercial banking segment. Income taxes are allocated based on the effective federal tax rate. The measurement of the performance of the business segments is based on the management structure of the Bank and is not necessarily comparable with similar information for any other financial institution. The
13
information presented is also not necessarily indicative of the segments operations, if they were independent entities.
Selected financial information by business segment for the three and six months ended June 30, 2007 and 2006 follows:
|
Three months |
|
Six months |
|
|||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
(In thousands) |
|
(In thousands) |
|
||||||||
Net interest income (expense): |
|
|
|
|
|
|
|
|
|
||||
Commercial banking |
|
$ |
13,555 |
|
$ |
13,461 |
|
$ |
26,957 |
|
$ |
26,444 |
|
Investment management and trust |
|
24 |
|
(11 |
) |
36 |
|
(21 |
) |
||||
Total |
|
$ |
13,579 |
|
$ |
13,450 |
|
$ |
26,993 |
|
$ |
26,423 |
|
Provision for loan losses: |
|
|
|
|
|
|
|
|
|
||||
Commercial banking |
|
$ |
460 |
|
$ |
600 |
|
$ |
1,240 |
|
$ |
950 |
|
Investment management and trust |
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
460 |
|
$ |
600 |
|
$ |
1,240 |
|
$ |
950 |
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
||||
Commercial banking |
|
$ |
4,388 |
|
$ |
4,298 |
|
$ |
8,347 |
|
$ |
8,424 |
|
Investment management and trust |
|
3,336 |
|
2,931 |
|
6,533 |
|
5,718 |
|
||||
Total |
|
$ |
7,724 |
|
$ |
7,229 |
|
$ |
14,880 |
|
$ |
14,142 |
|
Non-interest expense: |
|
|
|
|
|
|
|
|
|
||||
Commercial banking |
|
$ |
9,889 |
|
$ |
9,928 |
|
$ |
19,728 |
|
$ |
20,163 |
|
Investment management and trust |
|
1,595 |
|
1,350 |
|
3,130 |
|
2,893 |
|
||||
Total |
|
$ |
11,484 |
|
$ |
11,278 |
|
$ |
22,858 |
|
$ |
23,056 |
|
Tax expense |
|
|
|
|
|
|
|
|
|
||||
Commercial banking |
|
$ |
2,444 |
|
$ |
2,383 |
|
$ |
4,570 |
|
$ |
4,390 |
|
Investment management and trust |
|
618 |
|
550 |
|
1,204 |
|
981 |
|
||||
Total |
|
$ |
3,062 |
|
$ |
2,933 |
|
$ |
5,774 |
|
$ |
5,371 |
|
Net income: |
|
|
|
|
|
|
|
|
|
||||
Commercial banking |
|
$ |
5,150 |
|
$ |
4,848 |
|
$ |
9,766 |
|
$ |
9,365 |
|
Investment management and trust |
|
1,147 |
|
1,020 |
|
2,235 |
|
1,823 |
|
||||
Total |
|
$ |
6,297 |
|
$ |
5,868 |
|
$ |
12,001 |
|
$ |
11,188 |
|
14
(10) Income Taxes
Effective January 1, 2007, Bancorp adopted Financial Accounting Standards Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. The initial adoption of FIN 48 had no impact on the Companys financial statements. As of January 1, 2007, the gross amount of unrecognized tax benefits was $311,000. If recognized, all of the tax benefits would increase net income, resulting in a decrease of the effective tax rate. Management does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next twelve months.
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to statutes of limitation, changes in managements judgment about the level of uncertainty, status of examination, litigation and legislative activity and the addition or elimination of uncertain tax positions.
Bancorps policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of the date of adoption of FIN 48, the amount accrued for the potential payment of interest and penalties was $31,000. Federal and state income tax returns are open and subject to examination from the 2003 tax return year and forward.
There have been no material changes in unrecognized tax benefits from tax positions taken since the date of adoption.
(11) Subsequent Event
On July 17, 2007, the Board of Directors approved the expansion of the Companys stock repurchase plan by 550,000 shares. The Board also set July 2008 as the plans expiration date.
The Board of Directors first implemented the repurchase plan in 1999 and expanded the number of shares approved in 2005. At that time, the Companys plan authorized the repurchase of up to 577,500 shares, as adjusted for a five percent stock dividend in 2006. As of June 30, 2007, there were approximately 17,500 shares remaining for repurchase. With these remaining shares and the 550,000 shares approved in July 2007, the Company has the ability to repurchase approximately 567,500 shares.
Under its stock repurchase program, Bancorp may purchase shares from time to time at prevailing prices in open market transactions, subject to market conditions, share price and other considerations. Unsolicited negotiated transactions also are permitted.
15
S.Y.BANCORP, INC. AND SUBSIDIARY
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This item discusses the results of operations for S.Y. Bancorp, Inc. (Bancorp or Company), and its subsidiary, Stock Yards Bank & Trust Company (Bank) for the three and six month periods ended June 30, 2007 and compares those periods with the same periods of the previous year. Unless otherwise indicated, all references in this discussion to the Bank include Bancorp. In addition, the discussion describes the significant changes in the financial condition of Bancorp and the Bank that has occurred during the first six months of 2007 compared to December 31, 2006. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes presented in Part 1, Item 1 of this report.
This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although Bancorp believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to the following: economic conditions both generally and more specifically in the markets in which Bancorp and its subsidiaries operate; competition for Bancorps 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 Bancorps customers; other risks detailed in Bancorps filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.
Overview of 2007 through June 30
The second quarter of 2007 was highlighted by higher earnings driven primarily by a strong earning asset base and continued growth in the Companys investment management and trust services. Strong credit quality performance also characterized S.Y. Bancorps results for the second quarter, leading to a reduction in Companys provision for loan losses as compared to the second quarter of 2006 and first quarter of 2007 and helping to offset increasing competitive pressures affecting loan growth and margin. With these factors, the Company completed the second quarter and the first half of the year with net income exceeding the comparable period of 2006 by 7%.
As is the case with most banks, the primary source of Bancorps 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.
Net interest income increased 1% for the second quarter and 2% year to date compared with the year-earlier periods. The increase for the second quarter reflected growth in net interest earning assets, offset by ongoing pressure on the net interest margin. Growth in earning assets has been affected by payoffs in the construction loan portfolio and other transaction based business and slowly replaced by growth in commercial and industrial loans. Although net interest margin improved three basis points in the second quarter compared with the first quarter of 2007, net interest margin for the second quarter, at 4.26%, declined 15 basis points versus 4.41% in the year-earlier quarter. This compression was attributed to several factors. The Company has had higher interest expense associated with recent promotions of certificates of deposit causing the increase in deposit yields to outpace the increase in loan yields. Also, the persistence of a relatively flat yield curve, together with mounting competitive pressures on both loan and deposit interest rates, continue to adversely affect net interest margin.
16
While the Company believes it remains well positioned for the current interest rate environment, with its loan portfolio being split between approximately 60% fixed and 40% variable rates, it expects ongoing pressure on net interest margin.
Operating results were favorably impacted by a lower provision for loan losses in the second quarter of 2007. Based on the Banks systematic credit risk assessment process, including a declining level of non-performing loans, the Company recorded a provision for loan losses of $460,000 in the second quarter compared to $600,000 in the second quarter of 2006. For the first six months of 2007, the loan loss provision totaled $1,240,000 versus $950,000 in the year-earlier period. The Companys allowance for loan losses was 1.04% of total end-of-quarter loans at June 30, 2007, compared with 1.06% of total end-of-quarter loans at March 31, 2007, and 1.14% at June 30, 2006.
Non-performing loans at June 30, 2007 were 0.41%, relative to total loans, which showed improvement from 0.45% at the end of the first quarter of 2007, as well as from the 0.67% in the same quarter last year. Net charge-offs also remained low at 0.05% of average loans compared with 0.07% in the first quarter of 2007 and 0.03% in the second quarter of 2006. Management continues to view these metrics as an indication of overall sound asset quality and believes it has appropriately recognized the loan-loss exposure in its portfolio.
Non-interest income increased 7% in the second quarter compared with the same quarter last year, primarily due to higher investment management and trust income, which rose 14% during the quarter. This, along with higher bankcard transaction revenue, gains on sales of mortgage loans and other non-interest income, offset lower service charges on deposit accounts and brokerage fees and commissions for the quarter. Non-interest income increased 5% in the first half of 2007 compared with the year-earlier period, again driven primarily by investment management and trust income.
Non-interest expense increased 2% in the second quarter of 2007 versus the same period last year. The increase for the second quarter reflected higher salaries and employee benefits, due in part to the addition of staff associated with the development of a second office in the Indianapolis market and the Companys recently announced entry into the Cincinnati market, as well as higher data processing expense and net occupancy expense. Non-interest expense declined 1% in the first half of 2007 compared with the year-earlier period. For the year-to-date period of 2007, salaries and employee benefits were less than those of 2006 mainly due to lower health insurance expense, reduced stock compensation expense and deferral of salary expense related to loan originations. Further, the first quarter of 2007 reflected a reduction in state bank taxes resulting from tax credits purchased in the quarter. The Companys efficiency ratio improved to 53.22% from 54.54% in the first quarter of 2007 and 53.88% in the second quarter last year.
The following sections provide more details on subjects presented in this overview.
a) Results Of Operations
Net income of $6,297,000 for the three months ended June 30, 2007 increased $429,000, or 7%, from $5,868,000 for the comparable 2006 period. Basic net income per share was $0.44 for the second quarter of 2007, an increase of 7% from the $0.41 for the same period in 2006. Net income per share on a diluted basis was $0.43 for the second quarter of 2007 compared to $0.40 for the second quarter of 2006; an 8% increase. Annualized return on average assets and annualized return on average stockholders equity were 1.80% and 17.90%, respectively, for the second quarter of 2007, compared to 1.76% and 18.02%, respectively, for the same period in 2006.
17
Net income of $12,001,000 for the six months ended June 30, 2007 increased $813,000, or 7%, from $11,188,000 from the comparable 2006 period. Basic net income per share was $0.84 for the first six months of 2007, an increase of 9% from the $0.77 for the same period in 2006. Net income per share on a diluted basis was $0.82 for the first six months of 2007 compared to $0.76 for the first six months of 2006. This represents an 8% increase. Annualized return on average assets and annualized return on average stockholders equity were 1.72% and 17.26%, respectively, for the first six months of 2007, compared to 1.68% and 17.42%, respectively, for the same period in 2006.
Net Interest Income
The following tables present the average balance sheets for the three and six month periods ended June 30, 2007 and 2006 along with the related calculation of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. See the notes following the tables for further explanation.
|
|
Three months ended June 30 |
|
||||||||||||||
|
|
2007 |
|
2006 |
|
||||||||||||
|
|
Average |
|
|
|
Average |
|
Average |
|
|
|
Average |
|
||||
|
|
Balances |
|
Interest |
|
Rate |
|
Balances |
|
Interest |
|
Rate |
|
||||
|
|
(Dollars in thousands) |
|
||||||||||||||
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Federal funds sold |
|
$ |
11,430 |
|
$ |
151 |
|
5.30 |
% |
$ |
11,681 |
|
$ |
145 |
|
4.98 |
% |
Mortgage loans held for sale |
|
4,829 |
|
77 |
|
6.40 |
% |
3,101 |
|
51 |
|
6.60 |
% |
||||
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
95,999 |
|
1,008 |
|
4.21 |
% |
105,251 |
|
1,106 |
|
4.21 |
% |
||||
Tax-exempt |
|
28,452 |
|
393 |
|
5.54 |
% |
32,676 |
|
461 |
|
5.66 |
% |
||||
FHLB stock |
|
3,734 |
|
61 |
|
6.55 |
% |
3,502 |
|
49 |
|
5.61 |
% |
||||
Loans, net of unearned income |
|
1,160,064 |
|
21,402 |
|
7.40 |
% |
1,086,780 |
|
19,685 |
|
7.27 |
% |
||||
Total earning assets |
|
1,304,508 |
|
23,092 |
|
7.10 |
% |
1,242,991 |
|
21,497 |
|
6.94 |
% |
||||
Less allowance for loan losses |
|
12,514 |
|
|
|
|
|
12,230 |
|
|
|
|
|
||||
|
|
1,291,994 |
|
|
|
|
|
1,230,761 |
|
|
|
|
|
||||
Non-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
32,233 |
|
|
|
|
|
33,851 |
|
|
|
|
|
||||
Premises and equipment |
|
24,702 |
|
|
|
|
|
25,105 |
|
|
|
|
|
||||
Accrued interest receivable and other assets |
|
52,091 |
|
|
|
|
|
47,519 |
|
|
|
|
|
||||
Total assets |
|
$ |
1,401,020 |
|
|
|
|
|
$ |
1,337,236 |
|
|
|
|
|
||
18
|
|
Three months ended June 30 |
|
||||||||||||||
|
|
2007 |
|
2006 |
|
||||||||||||
|
|
Average |
|
|
|
Average |
|
Average |
|
|
|
Average |
|
||||
|
|
Balances |
|
Interest |
|
Rate |
|
Balances |
|
Interest |
|
Rate |
|
||||
|
|
(Dollars in thousands) |
|
||||||||||||||
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest bearing demand deposits |
|
$ |
214,763 |
|
$ |
795 |
|
1.48 |
% |
$ |
227,926 |
|
$ |
833 |
|
1.47 |
% |
Savings deposits |
|
42,557 |
|
53 |
|
0.50 |
% |
48,987 |
|
77 |
|
0.63 |
% |
||||
Money market deposits |
|
203,721 |
|
1,919 |
|
3.78 |
% |
174,124 |
|
1,400 |
|
3.22 |
% |
||||
Time deposits |
|
442,529 |
|
5,010 |
|
4.54 |
% |
423,935 |
|
4,184 |
|
3.96 |
% |
||||
Securities sold under agreements to repurchase and federal funds purchased |
|
83,901 |
|
720 |
|
3.44 |
% |
77,334 |
|
517 |
|
2.68 |
% |
||||
Other short-term borrowings |
|
661 |
|
6 |
|
3.64 |
% |
815 |
|
8 |
|
3.94 |
% |
||||
FHLB advances |
|
60,330 |
|
732 |
|
4.87 |
% |
30,000 |
|
309 |
|
4.13 |
% |
||||
Long-term debt |
|
90 |
|
1 |
|
4.46 |
% |
20,739 |
|
466 |
|
9.01 |
% |
||||
Total interest bearing liabilities |
|
1,048,552 |
|
9,236 |
|
3.53 |
% |
1,003,860 |
|
7,794 |
|
3.11 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Non-interest bearing demand deposits |
|
171,889 |
|
|
|
|
|
173,327 |
|
|
|
|
|
||||
Accrued interest payable and other liabilities |
|
39,446 |
|
|
|
|
|
29,438 |
|
|
|
|
|
||||
Total liabilities |
|
1,259,887 |
|
|
|
|
|
1,206,625 |
|
|
|
|
|
||||
Stockholders equity |
|
141,133 |
|
|
|
|
|
130,611 |
|
|
|
|
|
||||
Total liabilities and stockholders equity |
|
$ |
1,401,020 |
|
|
|
|
|
$ |
1,337,236 |
|
|
|
|
|
||
Net interest income |
|
|
|
$ |
13,856 |
|
|
|
|
|
$ |
13,703 |
|
|
|
||
Net interest spread |
|
|
|
|
|
3.57 |
% |
|
|
|
|
3.83 |
% |
||||
Net interest margin |
|
|
|
|
|
4.26 |
% |
|
|
|
|
4.41 |
% |
19
|
|
Six months ended June 30 |
|
||||||||||||||
|
|
2007 |
|
2006 |
|
||||||||||||
|
|
Average |
|
|
|
Average |
|
Average |
|
|
|
Average |
|
||||
|
|
Balances |
|
Interest |
|
Rate |
|
Balances |
|
Interest |
|
Rate |
|
||||
|
|
(Dollars in thousands) |
|
||||||||||||||
Earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Federal funds sold |
|
$ |
21,862 |
|
$ |
588 |
|
5.42 |
% |
$ |
25,320 |
|
$ |
565 |
|
4.50 |
% |
Mortgage loans held for sale |
|
3,885 |
|
124 |
|
6.44 |
% |
3,441 |
|
111 |
|
6.51 |
% |
||||
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Taxable |
|
99,620 |
|
2,156 |
|
4.36 |
% |
108,452 |
|
2,153 |
|
4.00 |
% |
||||
Tax-exempt |
|
28,920 |
|
800 |
|
5.58 |
% |
33,126 |
|
884 |
|
5.38 |
% |
||||
FHLB stock |
|
3,673 |
|
120 |
|
6.59 |
% |
3,434 |
|
97 |
|
5.70 |
% |
||||
Loans, net of unearned income |
|
1,151,437 |
|
42,193 |
|
7.39 |
% |
1,075,065 |
|
38,250 |
|
7.17 |
% |
||||
Total earning assets |
|
1,309,397 |
|
45,981 |
|
7.08 |
% |
1,248,838 |
|
42,060 |
|
6.79 |
% |
||||
Less allowance for loan losses |
|
12,498 |
|
|
|
|
|
12,247 |
|
|
|
|
|
||||
|
|
1,296,899 |
|
|
|
|
|
1,236,591 |
|
|
|
|
|
||||
Non-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and due from banks |
|
33,977 |
|
|
|
|
|
33,838 |
|
|
|
|
|
||||
Premises and equipment |
|
24,811 |
|
|
|
|
|
25,129 |
|
|
|
|
|
||||
Accrued interest receivable and other assets |
|
48,223 |
|
|
|
|
|
46,953 |
|
|
|
|
|
||||
Total assets |
|
$ |
1,403,910 |
|
|
|
|
|
$ |
1,342,511 |
|
|
|
|
|
||
20
|
|
Six months ended June 30 |
|
||||||||||||||
|
|
2007 |
|
2006 |
|
||||||||||||
|
|
Average |
|
|
|
Average |
|
Average |
|
|
|
Average |
|
||||
|
|
Balances |
|
Interest |
|
Rate |
|
Balances |
|
Interest |
|
Rate |
|
||||
|
|
(Dollars in thousands) |
|
||||||||||||||
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest bearing demand deposits |
|
$ |
214,187 |
|
$ |
1,563 |
|
1.47 |
% |
$ |
228,842 |
|
$ |
1,590 |
|
1.40 |
% |
Savings deposits |
|
42,252 |
|
103 |
|
0.49 |
% |
47,920 |
|
149 |
|
0.63 |
% |
||||
Money market deposits |
|
206,504 |
|
3,894 |
|
3.80 |
% |
179,911 |
|
2,780 |
|
3.12 |
% |
||||
Time deposits |
|
453,237 |
|
10,125 |
|
4.50 |
% |
420,508 |
|
8,046 |
|
3.86 |
% |
||||
Securities sold under agreements to repurchase and federal funds purchased |
|
81,151 |
|
1,352 |
|
3.36 |
% |
78,120 |
|
986 |
|
2.55 |
% |
||||
Other short-term borrowings |
|
634 |
|
6 |
|
1.91 |
% |
934 |
|
18 |
|
3.89 |
% |
||||
FHLB advances |
|
58,121 |
|
1,382 |
|
4.80 |
% |
33,204 |
|
647 |
|
3.93 |
% |
||||
Long-term debt |
|
97 |
|
3 |
|
6.24 |
% |
20,740 |
|
932 |
|
9.06 |
% |
||||
Total interest bearing liabilities |
|
1,056,183 |
|
18,428 |
|
3.52 |
% |
1,010,179 |
|
15,148 |
|
3.02 |
% |
||||
Non-interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Non-interest bearing demand deposits |
|
170,309 |
|
|
|
|
|
173,011 |
|
|
|
|
|
||||
Accrued interest payable and other liabilities |
|
37,166 |
|
|
|
|
|
29,830 |
|
|
|
|
|
||||
Total liabilities |
|
1,263,658 |
|
|
|
|
|
1,213,020 |
|
|
|
|
|
||||
Stockholders equity |
|
140,252 |
|
|
|
|
|
129,491 |
|
|
|
|
|
||||
Total liabilities and stockholders equity |
|
$ |
1,403,910 |
|
|
|
|
|
$ |
1,342,511 |
|
|
|
|
|
||
Net interest income |
|
|
|
$ |
27,553 |
|
|
|
|
|
$ |
26,912 |
|
|
|
||
Net interest spread |
|
|
|
|
|
3.56 |
% |
|
|
|
|
3.77 |
% |
||||
Net interest margin |
|
|
|
|
|
4.24 |
% |
|
|
|
|
4.34 |
% |
21
Notes to the average balance and interest rate tables:
· Net interest income, the most significant component of the Banks earnings is total interest income less total interest expense. The level of net interest income is determined by the mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.
· Net interest spread is the difference between the taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.
· Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders equity.
· Interest income on a fully tax equivalent basis includes the additional amount of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and loans have been calculated on a fully tax equivalent basis using a federal income tax rate of 35%. The approximate tax equivalent adjustments to interest income were $277,000 and $253,000, respectively, for the three month periods ended June 30, 2007 and 2006 and $560,000 and $489,000, respectively, for the six month periods end June 30, 2007 and 2006.
Fully taxable equivalent net interest income of $13,856,000 for the three months ended June 30, 2007 increased $153,000, or 1.1%, from $13,703,000 when compared to the same period last year. Net interest spread and net interest margin were 3.57% and 4.26%, respectively, for the second quarter of 2007 and 3.83% and 4.41%, respectively, for the second quarter of 2006.
Fully taxable equivalent net interest income of $27,553,000 for the six months ended June 30, 2007 increased $641,000, or 2.4%, from the same period last year. Net interest spread and net interest margin were 3.56% and 4.24%, respectively, for the first six months of 2007 and 3.77% and 4.34%, respectively, for the first six months of 2006.
While the Company believes it remains well positioned for the current interest rate environment, with its loan portfolio being split between approximately 60% fixed and 40% variable rates, it expects ongoing pressure on net interest margin. Assuming a fairly neutral rate environment for the remainder of 2007, the Company expects its margin to continue slight contraction primarily based on rate competition on loans and deposits.
Average earning assets increased $60,559,000, or 4.8%, to $1,309,397,000 for the first six months of 2007 compared to 2006, primarily reflecting growth in the loan portfolio. Average interest bearing liabilities increased $46,004,000, or 4.6%, to $1,056,183,000 for the first six months of 2007 compared to 2006 primarily due to increases in time and money market deposits as well as FHLB advances.
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. Bank management evaluates interest rate sensitivity while attempting to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.
22
Bancorp uses an earnings simulation model to estimate and evaluate the impact of changing interest rates on earnings. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments, in a one year forecast. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The 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 June 30, 2007 simulation analysis indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in interest rates would have a negative effect on net interest income. These estimates are summarized below.
Interest Rate Simulation Sensitivity Analysis
|
Net interest |
|
|
|
|
|
|
Increase 200bp |
|
7.24 |
% |
Increase 100bp |
|
3.61 |
|
Decrease 100bp |
|
(3.58 |
) |
Decrease 200bp |
|
(7.14 |
) |
|
|
|
|
23
Provision for Loan Losses
The allowance for loan losses is based on managements continuing review and risk evaluation of individual loans, loss experience, current economic conditions, risk characteristics of the various categories of loans, and such other factors that, in managements judgment, require current recognition in estimating loan losses.
Management has established loan grading procedures which result in specific allowance allocations for any estimated inherent risk of loss. For loans not individually graded, a general allowance allocation is computed using factors typically developed over time based on actual loss experience. The specific and general allocations plus consideration of qualitative factors represent managements best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations the entire allowance is available to absorb any credit losses.
An analysis of the changes in the allowance for loan losses and selected ratios for the three and six month periods ended June 30, 2007 and 2006 follows:
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
(Dollars in thousands) |
|
||||||||||
Balance at the beginning of the period |
|
$ |
12,183 |
|
$ |
12,065 |
|
$ |
12,203 |
|
$ |
12,035 |
|
Provision for loan losses |
|
460 |
|
600 |
|
1,240 |
|
950 |
|
||||
Loan charge-offs, net of recoveries |
|
(578 |
) |
(273 |
) |
(1,378 |
) |
(593 |
) |
||||
Balance at the end of the period |
|
$ |
12,065 |
|
$ |
12,392 |
|
$ |
12,065 |
|
$ |
12,392 |
|
Average loans, net of unearned income |
|
$ |
1,160,064 |
|
$ |
1,086,780 |
|
$ |
1,151,437 |
|
$ |
1,075,065 |
|
Provision for loan losses to average loans (1) |
|
0.04 |
% |
0.06 |
% |
0.11 |
% |
0.09 |
% |
||||
Net loan charge-offs to average loans (1) |
|
0.05 |
% |
0.03 |
% |
0.12 |
% |
0.06 |
% |
||||
Allowance for loan losses to average loans |
|
1.04 |
% |
1.14 |
% |
1.05 |
% |
1.15 |
% |
||||
Allowance for loan losses to period-end loans |
|
1.04 |
% |
1.14 |
% |
1.04 |
% |
1.14 |
% |
||||
Allowance to nonperforming loans |
|
252.99 |
% |
170.81 |
% |
252.99 |
% |
170.81 |
% |
(1) Amounts not annualized
The provision for loan losses increased $290,000 during the first six months of 2007 as compared to 2006. The provision for loan losses for the period is calculated after considering credit quality factors, and ultimately relies on an overall internal analysis of the risk in the loan portfolio. Based on this detailed analysis of credit risk, management considers the allowance for loan losses adequate to cover probable losses inherent in the loan portfolio at June 30, 2007. Among factors considered in determining the provision for allowance for loan losses are net charge-offs and non-performing loans. Net charge-offs increased $785,000 for the first six months of 2007 compared to the same period in 2006 reflecting a charge-off of a single loan totaling $800,000 in the first quarter 2007.
Please refer to the Non-performing Loans and Assets section of this report for further information regarding asset quality.
Non-interest Income and Expenses
The following table sets forth the major components of non-interest income and expenses for the three and six month periods ended June 30, 2007 and 2006.
24
|
Three months |
|
Six months |
|
|||||||||
|
|
ended June 30 |
|
ended June 30 |
|
||||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
||||
|
|
(In thousands) |
|
||||||||||
Non-interest income: |
|
|
|
|
|
|
|
|
|
||||
Investment management and trust services |
|
$ |
3,336 |
|
$ |