Edgar Filing: S Y BANCORP INC

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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 June 30, 2009

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 o 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value 13,579,968

Shares issued and outstanding at July 30, 2009

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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:

	·	Unaudited Condensed Consolidated Balance Sheets June 30, 2009 and December 31, 2008

	·	Unaudited Condensed Consolidated Statements of Income
		for the three and six months ended June 30, 2009 and 2008

	·	Unaudited Condensed Consolidated Statements of Cash Flows
		for the six months ended June 30, 2009 and 2008

	·	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity
		for the six months ended June 30, 2009

	·	Unaudited Condensed Consolidated Statements of Comprehensive Income
		for the three and six months ended June 30, 2009 and 2008

	·	Notes to Unaudited Condensed 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 4.		Submission of Matters to a Vote of Security Holders

Item 6.		Exhibits

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S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Balance Sheets

June 30, 2009 and December 31, 2008

(In thousands, except share data)

	(Unaudited)
	June 30		December 31,
	2009		2008
Assets
Cash and due from banks	$	27,559	$	24,859
Federal funds sold	6,200		2,254
Mortgage loans held for sale	15,459		2,950
Securities available for sale (amortized cost of $220,592 in 2009 and $169,505 in 2008)	223,169		173,371
Securities held to maturity (fair value of $41 in 2009 and $44 in 2008)	39		43
Federal Home Loan Bank stock and other securities	5,547		4,324
Loans	1,398,679		1,349,637
Less allowance for loan losses	17,077		15,381
Net loans	1,381,602		1,334,256
Premises and equipment, net	27,402		27,926
Bank owned life insurance	24,629		24,142
Accrued interest receivable	5,715		5,955
Other assets	29,438		28,683
Total assets	$	1,746,759	$	1,628,763

Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	205,403	$	182,778
Interest bearing	1,131,610		1,088,147
Total deposits	1,337,013		1,270,925
Securities sold under agreements to repurchase and federal funds purchased	92,116		66,517
Other short-term borrowings	1,717		1,132
Accrued interest payable	582		690
Other liabilities	34,419		34,039
Federal Home Loan Bank advances	90,458		70,000
Subordinated debentures	40,930		40,960
Total liabilities	1,597,235		1,484,263
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 13,580,317 and 13,473,740 shares in 2009 and 2008, respectively	6,157		5,802
Additional paid-in capital	9,133		7,485
Retained earnings	132,782		128,923
Accumulated other comprehensive income	1,452		2,290
Total stockholders’ equity	149,524		144,500
Total liabilities and stockholders’ equity	$	1,746,759	$	1,628,763

See accompanying notes to unaudited condensed consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Income

For the three and six months ended June 30, 2009 and 2008

(In thousands, except per share data)

	For three months ended				For six months ended
	June 30,				June 30,
	2009		2008		2009		2008
Interest income:
Loans	$	19,204	$	20,050	$	37,947	$	40,382
Federal funds sold	17		84		20		139
Mortgage loans held for sale	105		87		181		148
Securities — taxable	1,187		1,010		2,608		2,202
Securities — tax-exempt	284		246		558		484
Total interest income	20,797		21,477		41,314		43,355
Interest expense:
Deposits	4,664		5,635		9,337		12,661
Securities sold under agreements to repurchase and federal funds purchased	65		276		146		730
Other short-term borrowings	—		117		—		227
Federal Home Loan Bank advances	868		1,033		1,648		2,059
Subordinated debentures	883		1		1,758		2
Total interest expense	6,480		7,062		12,889		15,679
Net interest income	14,317		14,415		28,425		27,676
Provision for loan losses	2,200		975		3,825		2,200
Net interest income after provision for loan losses	12,117		13,440		24,600		25,476
Non-interest income:
Investment management and trust services	2,801		3,238		5,472		6,517
Service charges on deposit accounts	2,038		2,117		3,849		4,109
Bankcard transaction revenue	747		691		1,406		1,312
Gains on sales of mortgage loans held for sale	444		319		943		755
Brokerage commissions and fees	437		442		822		883
Bank owned life insurance income	245		258		488		510
Other	1,352		592		1,645		1,048
Total non-interest income	8,064		7,657		14,625		15,134
Non-interest expenses:
Salaries and employee benefits	7,629		7,326		14,989		14,633
Net occupancy expense	1,013		1,036		2,021		2,045
Data processing expense	1,002		896		1,808		1,648
Furniture and equipment expense	307		276		599		552
State bank taxes	474		314		862		654
FDIC insurance expense	1,245		90		1,667		264
Other	2,360		2,394		4,353		4,606
Total non-interest expenses	14,030		12,332		26,299		24,402
Income before income taxes	6,151		8,765		12,926		16,208
Income tax expense	1,863		2,636		3,901		5,041
Net income	$	4,288	$	6,129	$	9,025	$	11,167
Net income per share:
Basic	$	0.32	$	0.46	$	0.67	$	0.83
Diluted	0.31		0.45		0.66		0.82
Average common shares:
Basic	13,564		13,409		13,532		13,431
Diluted	13,729		13,584		13,683		13,598

See accompanying notes to unaudited condensed consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2009 and 2008

(In thousands)

	2009			2008
Operating activities:
Net income	$	9,025		$	11,167
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	3,825			2,200
Depreciation, amortization and accretion, net	1,009			1,248
Deferred income tax benefit	(848		)	(485		)
Gain on sales of mortgage loans held for sale	(943		)	(755		)
Origination of mortgage loans held for sale	(139,441		)	(57,346		)
Proceeds from sale of mortgage loans held for sale	127,875			57,320
Bank owned life insurance income	(488		)	(510		)
Increase in value of private investment fund	(142		)	—
Gain (loss) on the sale of other real estate	2			(2		)
Stock compensation expense	328			363
Excess tax benefits from share-based compensation arrangements	(98		)	(1		)
Reversal of valuation of mortgage servicing rights	(176		)	—
Decrease (increase) in accrued interest receivable and other assets	1,081			(1,138		)
Increase in accrued interest payable and other liabilities	351			4,486
Net cash provided by operating activities	1,360			16,547
Investing activities:
Purchases of securities available for sale	(116,082		)	(42,614		)
Proceeds from maturities of securities available for sale	64,032			92,129
Proceeds from maturities of securities held to maturity	4			786
Net increase in loans	(51,231		)	(120,171		)
Purchases of premises and equipment	(723		)	(2,456		)
Proceeds from sale of other real estate	58			1,338
Net cash used in investing activities	(103,942		)	(70,988		)
Financing activities:
Net increase in deposits	66,088			156,625
Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased	25,599			(52,930		)
Net increase in other short-term borrowings	585			4,052
Proceeds from Federal Home Loan Bank advances	20,460			—
Repayments of Federal Home Loan Bank advances	(2		)	—
Repayments of subordinated debentures	(30		)	(30		)
Issuance of common stock for options and dividend reinvestment plan	1,315			422
Excess tax benefits from share-based compensation arrangements	98			1
Common stock repurchases	(296		)	(5,272		)
Cash dividends paid	(4,589		)	(4,486		)
Net cash provided by financing activities	109,228			98,382
Net increase in cash and cash equivalents	6,646			43,941
Cash and cash equivalents at beginning of period	27,113			39,329
Cash and cash equivalents at end of period	$	33,759		$	83,270
Supplemental cash flow information:
Income tax payments	$	4,495		$	4,200
Cash paid for interest	12,995			15,855
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	60		$	406

See accompanying notes to unaudited condensed consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity

For the six months ended June 30, 2009

(In thousands, except per share data)

												Accumulated
	Common stock											other
	Number of					Additional			Retained			comprehensive
	shares		Amount			paid-in capital			earnings			income (loss)			Total
Balance December 31, 2008	13,474		$	5,802		$	7,485		$	128,923		$	2,290		$	144,500
Net income	—		—			—			9,025			—			9,025

Change in accumulated other comprehensive loss, net of tax	—		—			—			—			(838		)	(838		)

Stock compensation expense	—		—			328			—			—			328

Stock issued for stock options exercised and dividend reinvestment plan	93		311			1,102			—			—			1,413

Stock issued for non-vested restricted stock	25		85			481			(566		)	—			—

Cash dividends, $0.34 per share	—		—			—			(4,608		)	—			(4,608		)

Shares repurchased or cancelled	(12	)	(41		)	(263		)	8			—			(296		)

Balance June 30, 2009	13,580		$	6,157		$	9,133		$	132,782		$	1,452		$	149,524

See accompanying notes to unaudited condensed consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Comprehensive Income

For the three and six months ended June 30, 2009 and 2008

(In thousands)

	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Net income	$	4,288		$	6,129		$	9,025		$	11,167
Other comprehensive income (loss), net of tax:
Unrealized losses on securities available for sale:
Unrealized gains losses arising during the period (net of tax of ($58), (558), ($451) and ($159), respectively)	(108		)	(1,036		)	(838		)	(296		)
Other comprehensive income	(108		)	(1,036		)	(838		)	(296		)
Comprehensive income	$	4,180		$	5,093		$	8,187		$	10,871

See accompanying notes to unaudited condensed consolidated financial statements.

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(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”). 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, 2008 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, 2009 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 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 materially impact Bancorp’s financial position and its results from operations.

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(b) Securities

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

June 30, 2009	Amortized		Unrealized				Fair
Securities available for sale	Cost		Gains		Losses		Value

U.S. Treasury and other U.S. government obligations	$	2,998	$	85	$	—	$	3,083
Government sponsored enterprise obligations	131,143		1,586		—		132,729
Total government securities	134,141		1,671		—		135,812

Mortgage-backed securities - GNMA	34,828		601		20		35,409
Mortgage-backed securities - government agencies	18,805		175		7		18,973
Total mortgage-backed securities	53,633		776		27		54,382

Obligations of states and political subdivisions	29,585		871		39		30,417
Trust preferred securities of financial institutions	3,233		—		675		2,558

Total securities available for sale	$	220,592	$	3,318	$	741	$	223,169

December 31, 2008	Amortized		Unrealized				Fair
Securities available for sale	Cost		Gains		Losses		Value

U.S. Treasury and other U.S. government obligations	$	6,796	$	159	$	—	$	6,955
Government sponsored enterprise obligations	104,137		3,480		—		107,617
Total government securities	110,933		3,639		—		114,572

Mortgage-backed securities - GNMA	22,256		320		10		22,566
Mortgage-backed securities - government agencies	6,642		59		4		6,697
Total mortgage-backed securities	28,898		379		14		29,263

Obligations of states and political subdivisions	26,441		712		69		27,084
Trust preferred securities of financial institutions	3,233		—		781		2,452

Total securities available for sale	$	169,505	$	4,730	$	864	$	173,371

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The amortized cost, unrealized gains and losses, and fair value of securities held to maturity follow:

June 30, 2009	Amortized		Unrealized				Fair
Securities held to maturity	Cost		Gains		Losses		Value

June 30, 2009
Mortgage-backed securities - government agencies	$	39	$	2	$	—	$	41

	$	39	$	2	$	—	$	41

December 31, 2008	Amortized		Unrealized				Fair
Securities held to maturity	Cost		Gains		Losses		Value

December 31, 2008
Mortgage-backed securities - government agencies	$	43	$	1	$	—	$	44

	$	43	$	1	$	—	$	44

A summary of securities as of June 30, 2009 based on maturity is presented below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

	Securities				Securities
	Available for Sale				Held to Maturity
(In thousands)	Amortized Cost		Approximate Fair Value		Amortized Cost		Approximate Fair Value

Due within one year	$	94,157	$	94,287	$	—	$	—
Due within one year through five years	40,537		41,713		—		—
Due within five years through ten years	34,877		35,926		28		30
Due after ten years	51,021		51,243		11		11

	$	220,592	$	223,169	$	39	$	41

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Securities with unrealized losses at June 30, 2009 and December 31, 2008, not recognized in income 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

June 30, 2009
Mortgage-backed securities - GNMA	$	8,360	$	20	$	—	$	—	$	8,360	$	20
Mortgage-backed securities - government agencies	3,493		7		—		—		3,493		7
Obligations of states and political subdivisions	2,312		39		—		—		2,312		39
Trust preferred securities of financial institutions	—		—		2,558		675		2,558		675

Total temporarily impaired securities	$	14,165	$	66	$	2,558	$	675	$	16,723	$	741

December 31, 2008
Mortgage-backed securities - government agencies	$	6,035	$	14	$	—	$	—	$	6,035	$	14
Obligations of states and political subdivisions	4,259		69		—		—		4,259		69
Trust preferred securities of financial institutions	2,452		781		—		—		2,452		781

Total temporarily impaired securities	$	12,746	$	864	$	—	$	—	$	12,746	$	864

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The investment portfolio has 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 primarily concentrated in Kentucky, Indiana and Ohio. Each of these securities has a rating of A or better by a recognized bond rating agency.

Unrealized losses on Bancorp’s investment securities portfolio have not been recognized in income because the securities are of high credit quality, the decline in fair values is largely due to changes in the prevailing interest rate and credit environment since the purchase date, management does not intend to sell the investments, and it is not more likely than not that the Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. The fair value is expected to recover as the securities reach their maturity date and/or the interest rate and credit environment returns to conditions similar to when the securities were purchased. The Bancorp does not consider those investments to be other-than-temporarily impaired at June 30, 2009.

Debt securities with gross unrealized losses consist of 12 and 18 separate investment positions as of June 30, 2009 and December 31, 2008, respectively.

As of June 30, 2009, Bancorp has 3 securities totaling $2,558,000 which were impaired for 12 months or longer. At June 30, 2009, these trust preferred securities with a total amortized cost of $3,233,000 had an unrealized loss totaling $675,000 caused by interest rate changes and other market conditions. Management evaluates the impairment of securities on a quarterly basis, considering various factors including issuer financial condition, agency rating, payment prospects, impairment duration and general industry condition. Based on the evaluation as of June 30, 2009, management is of the opinion that none of the securities are other than temporarily impaired. Management does not intend to sell the investments, and it is not more likely than not that the Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. Volatility in these markets subsequent to June 30, 2009 could give rise to other-than-temporary impairment in the future.

Additional securities held by the Company at June 30, 2009 consist of the following:

					Unrealized
Federal Home Loan Bank stock and other securities	Cost		Fair Value		Gain/(Loss)
Federal Home Loan Bank stock	$	4,546	$	4,546	$	—
Other non-marketable securities	1,001		1,001		—
Total Federal Home Loan Bank stock and other securities	$	5,547	$	5,547	$	—

(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 is 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.

Bancorp currently has one stock-based compensation plan. The 2005 Stock Incentive Plan reserved 735,000 shares of common stock for issuance of stock based awards. As of June 30, 2009, there were 151,399 shares available for future awards. Bancorp’s 1995 Stock Incentive Plan expired in

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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. Prior to 2009, those granted to certain executive officers vested six months after grant date. Restricted shares generally vest over three to five years, with limited exceptions of shorter vesting schedules due to anticipated retirement. All awards under both plans 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.

In accordance with SFAS No. 123R, Bancorp recognized, within salaries and employee benefits in the consolidated statements of income, stock-based compensation expense of $179,900 and $218,000 before income taxes and a deferred tax benefit of $63,000 and $76,000 resulting in a reduction of net income of $116,900 and $142,000 for the second quarter of 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, Bancorp recognized $328,200 and $363,000 of compensation expense before taxes, a deferred tax benefit of $114,900 and $127,000, and a reduction of net income of $213,300 and $236,000, respectively. Bancorp expects to record an additional $365,000 of stock-based compensation expense in 2009. As of June 30, 2009 Bancorp has $2,167,000 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 $768,000 and $422,000 from the exercise of options during the first six months of 2009 and 2008, 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 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 following assumptions were used in SAR/option valuations:

	2009		2008

Dividend yield	2.11	%	1.95	%
Expected volatility	23.59		14.99
Risk free interest rate	3.11		3.84
Forfeitures	5.96		5.65
Expected life of options and SARs (in years)	7.7		7.5

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

The dividend yield and expected volatility are based on historical information corresponding to the expected life of awards granted. The expected volatility for 2009 is the volatility of the underlying shares for the expected term on a monthly basis. Prior to 2009, volatility was calculated 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 awards.

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A summary of stock option and SARs activity and related information for the six months ended June 30, 2009 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		Value		Life

At December 31, 2008
Vested and exercisable	783		$	9.82-26.83	$	19.03	$	6,637	$	4.14	4.67
Unvested	244		20.25-26.83		24.74		672		5.47		8.10
Total outstanding	1,027		9.82-26.83		20.39		7,309		4.46		5.48

Granted	102		22.14-24.30		22.15		206		5.36
Exercised	(83	)	9.82-18.62		12.83		916		2.48
Forfeited	(6	)	22.14-26.83		24.67		2		5.48

At June 30, 2009
Vested and exercisable	762		9.82-26.83		20.16		3,262		4.44		4.76
Unvested	278		20.90-26.83		23.80		265		5.41		8.43
Total outstanding	1,040		9.82-26.83		21.13		$	3,527	4.70		5.74

Vested during quarter	2		20.25-24.02		20.78		$	6	4.78

The weighted average fair values of options and SARs granted in 2009 and 2008 were $5.36 and $4.57, respectively.

In the first quarter of 2009, Bancorp granted 102,100 SARs at the weighted average current market price of $22.15 and a fair value of $5.36. These SARs will vest 20% per year over the next five years. All SARs expire ten years from the date of grant. Also, in the first quarter of 2009, Bancorp granted 25,542 shares of restricted common stock at the weighted average current market price of $22.15. These grants generally vest over three to five years, with limited exceptions of shorter vesting schedules due to anticipated retirement.

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(2) Impaired Loans and Allowance for Loan Losses

An analysis of the changes in the allowance for loan losses for the six months ended June 30, 2009 and 2008 follows (in thousands):

	2009			2008
Beginning balance January 1,	$	15,381		$	13,450
Provision for loan losses	3,825			2,200
Loans charged off	(2,458		)	(1,537		)
Recoveries	329			343
Ending balance June 30,	$	17,077		$	14,456

Information about impaired loans follows (in thousands):

	June 30, 2009		December 31, 2008
Principal balance of impaired loans	$	6,123	$	4,455
Impaired loans with a valuation allowance	4,222		2,724
Amount of valuation allowance	1,126		1,255
Impaired loans with no valuation allowance	1,901		1,731
Average balance of impaired loans for the period	5,039		4,054

(3) Federal Home Loan Bank Advances

The Bank had outstanding borrowings of $90.5 million, at June 30, 2009, via six separate advances as detailed in the table below.

Amount

Type

Amortization

Maturity

Call Feature

Next Call Date

30,000,000

Fixed rate

None

November 2009

Non callable

20,000,000

Fixed rate

None

December 2010

Quarterly

September 2009

20,000,000

Fixed rate

None

May 2012

Quarterly

August 2009

10,000,000

Fixed rate

None

April 2012

Non callable

10,000,000

Fixed rate

None

April 2014

Non callable

458,000

Fixed rate

15 Year

April 2024

Non callable

90,458,000

For the first five advances, interest payments are due monthly, with principal due at maturity. For the sixth advance, principal and interest payments are due monthly based on a 15 year amortization schedule. The weighted average rate of these six advances was 4.02% at June 30, 2009. Advances from the FHLB are collateralized by certain commercial and residential real estate mortgage loans under a blanket mortgage collateral agreement and FHLB stock.

The Bank’s agreement with the Federal Home Loan Bank of Cincinnati (FHLB) enables the Bank to borrow up to an additional $91.4 million as of June 30, 2009 under terms to be established at the time of the advance. The Bank also has a standby letter of credit from the FHLB for $20 million outstanding at June 30, 2009. Under Kentucky law, customer cash balances in Investment Management and Trust accounts, may be retained as deposits in the Bank. Kentucky law requires these deposits above the per account protection provided by the FDIC, to be backed by some form of collateral. The standby letter of credit from the FHLB collateralizes these accounts.

(4) Goodwill

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.

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(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 actuarially determined pension costs are expensed and accrued over the service period. The plan is unfunded and benefits are paid from the Bank’s assets. Information about the components of the net periodic benefit cost of the defined benefit plan follows (in thousands):

	Three months ended June 30				Six months ended June 30
	2009		2008		2009		2008
Components of net periodic benefit cost:
Service cost	$	—	$	—	$	—	$	—
Interest cost	26		28		52		55
Expected return on plan assets	—		—		—		—
Amortization of prior service cost	—		—		—		—
Amortization of the net loss	6		6		12		12
Net periodic benefit cost	$	32	$	34	$	64	$	67

(6) Commitments to Extend Credit

As of June 30, 2009, 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 management’s opinion, commitments to extend credit of $382,900,000 including standby letters of credit of $31,788,000 represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of June 30, 2009. Commitments to extend credit were $314,478,000, including letters of credit of $21,869,000, as of December 31, 2008. Bancorp’s exposure to credit loss in the event of nonperformance by the other party to these commitments is represented by the contractual amount of these instruments. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments.

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 customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential properties and real estate under development.

Standby letters of credit and financial guarantees written are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements.

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(7) Preferred Stock

At Bancorp’s 2003 annual meeting of shareholders, 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, 2009.

(8) Net Income Per Share

The following table reflects, for the three and six months ended June 30, 2009 and 2008, 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
	June				June
	2009		2008		2009		2008
Net income, basic and diluted	$	4,288	$	6,129	$	9,025	$	11,167
Average shares outstanding	13,564		13,409		13,532		13,431
Effect of dilutive securities	165		175		151		167

Average shares outstanding including dilutive securities	13,729		13,584		13,683		13,598

Net income per share, basic	$	0.32	$	0.46	$	0.67	$	0.83
Net income per share, diluted	$	0.31	$	0.45	$	0.66	$	0.82

(9) Segments

The Bank’s, and thus Bancorp’s, 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 Bank’s mortgage banking and securities 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 to the investment management and trust segment based on the marginal 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 information presented is also not necessarily indicative of the segments’ operations, if they were independent entities.

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Selected financial information by business segment for the three and six month periods ended June 30, 2009 and 2008 follows:

	Three months				Six months
	ended June 30				ended June 30
	2009		2008		2009		2008
	(In thousands)				(In thousands)
Net interest income:
Commercial banking	$	14,249	$	14,333	$	28,278	$	27,509
Investment management and trust	68		82		147		167
Total	$	14,317	$	14,415	$	28,425	$	27,676

Provision for loan losses:
Commercial banking	$	2,200	$	975	$	3,825	$	2,200
Investment management and trust	—		—		—		—
Total	$	2,200	$	975	$	3,825	$	2,200

Non-interest income:
Commercial banking	$	5,263	$	4,419	$	9,153	$	8,617
Investment management and trust	$	2,801	3,238		5,472		6,517
Total	8,064		$	7,657	$	14,625	$	15,134

Non-interest expense:
Commercial banking	$	12,327	$	10,722	$	23,074	$	21,313
Investment management and trust	1,703		1,610		3,225		3,089
Total	$	14,030	$	12,332	$	26,299	$	24,402

Tax expense
Commercial banking	$	1,455	$	2,039	$	3,063	$	3,784
Investment management and trust	408		597		838		1,257
Total	$	1,863	$	2,636	$	3,901	$	5,041

Net income:
Commercial banking	$	3,530	$	5,016	$	7,469	$	8,829
Investment management and trust	758		1,113		1,556		2,338
Total	$	4,288	$	6,129	$	9,025	$	11,167

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(10) Income Taxes

Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”) provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. As of December 31, 2008 and June 30, 2009, the gross amount of unrecognized tax benefits was $230,000. If recognized, all of the tax benefits would increase net income, resulting in a decrease of the effective tax rate. 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 management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and the addition or elimination of uncertain tax positions.

Bancorp’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of December 31, 2008 and June 30, 2009, the amount accrued for the potential payment of interest and penalties was $20,000.

(11) Fair Value Measurements

Effective January 1, 2008 the Company adopted FASB Statement No. 157, “Fair Value Measurements”. This statement is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by Generally Accepted Accounting Principals (“GAAP”); it does not create or modify any current GAAP requirements to apply fair value accounting. FASB Statement No. 157 prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. The adoption of FASB Statement No. 157 did not have an impact on Bancorp’s consolidated financial statements. In February 2008 the FASB issued a statement delaying the effective date of Statement No. 157 for nonfinancial assets and nonfinancial liabilities except those that are recognized or disclosed at fair value on a recurring basis. Accordingly, the Company began applying Statement No. 157 to other real estate owned and goodwill in 2009.

Statement No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. Statement No. 157 also establishes a hierarchy to group assets and liabilities carried at fair value in three levels based upon the markets in which the assets and liabilities trade and the reliability of assumptions used to determine fair value. These levels are:

· Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.

· Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

· Level 3 Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include pricing models, discounted cash flows and other similar techniques.

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Our policy is to maximize the use of observable inputs and minimize the use of unobservable inputs in fair value measurements. Where there exists limited or no observable market data, we use our own estimates generally considering characteristics of the asset/liability, the current economic and competitive environment and other factors. For this reason, results cannot be determined with precision and may not be realized on an actual sale or immediate settlement of the asset or liability.

The Company’s investment securities available for sale are recorded at fair value on a recurring basis. Other accounts including mortgage loans held for sale, mortgage servicing rights, impaired loans and other real estate owned may be recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets.

The portfolio of investment securities available for sale is comprised of debt securities of the U.S. Treasury and other U.S. government-sponsored corporations, mortgage-backed securities, obligations of state and political subdivisions, and trust preferred securities of other banks. Certain trust preferred securities are priced using quoted prices of identical securities in an active market. These measurements are classified as Level 1 in the hierarchy above. All other securities are priced using standard industry models or matrices with various assumptions such as yield curves, volatility, prepayment speeds, default rates, time value, credit rating and market prices for the instruments. These assumptions are generally observable in the market place and can be derived from or supported by observable data. These measurements are classified as Level 2 in the hierarchy above.

Below are the carrying values of assets measured at fair value on a recurring basis (in thousands).

	Fair Value at June 30, 2009
Investment securities available for sale	Total		Level 1		Level 2		Level 3

U.S. Treasury and other U.S. government obligations	$	3,083	$	—	$	3,083	$	—
Government sponsored enterprise obligations	132,729		—		132,729		—
Total government securities	135,812		—		135,812		—

Mortgage-backed securities - GNMA	35,409		—		35,409		—
Mortgage-backed securities - government agencies	18,973		—		18,973		—
Total mortgage-backed securities	54,382		—		54,382		—