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 September 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 (Do not check if a smaller reporting company)		Smaller reporting company 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 issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value 13,587,988

Shares issued and outstanding at October 29, 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 September 30, 2009 and December 31, 2008

	–	Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2009 and 2008

	–	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008

	–	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2009

	–	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 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 6.		Exhibits

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S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Balance Sheets

September 30, 2009 and December 31, 2008

(In thousands, except share data)

	(Unaudited)
	September 30		December 31,
	2009		2008
Assets
Cash and due from banks	$	23,935	$	24,859
Federal funds sold	12,440		2,254
Mortgage loans held for sale	5,120		2,950
Securities available for sale (amortized cost of $228,611 in 2009 and $169,505 in 2008)	233,223		173,371
Securities held to maturity (fair value of $39 in 2009 and $44 in 2008)	37		43
Federal Home Loan Bank stock and other securities	5,547		4,324

Loans	1,412,178		1,349,637
Less allowance for loan losses	19,839		15,381
Net loans	1,392,339		1,334,256
Premises and equipment, net	28,408		27,926
Bank owned life insurance	24,879		24,142
Accrued interest receivable	5,875		5,955
Other assets	31,730		28,683
Total assets	$	1,763,533	$	1,628,763
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	216,490	$	182,778
Interest bearing	1,145,261		1,088,147
Total deposits	1,361,751		1,270,925
Securities sold under agreements to repurchase and federal funds purchased	80,831		66,517
Other short-term borrowings	1,372		1,132
Accrued interest payable	635		690
Other liabilities	34,293		34,039
Federal Home Loan Bank advances	90,456		70,000
Subordinated debentures	40,930		40,960
Total liabilities	1,610,268		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 13,588,004 and 13,473,740 shares in 2009 and 2008, respectively	6,183		5,802
Additional paid-in capital	9,434		7,485
Retained earnings	134,873		128,923
Accumulated other comprehensive income	2,775		2,290
Total stockholders’ equity	153,265		144,500
Total liabilities and stockholders’ equity	$	1,763,533	$	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 nine months ended September 30, 2009 and 2008

(In thousands, except per share data)

	For three months ended					For Nine months ended
	September 30,					September 30,
	2009		2008			2009		2008
Interest income:
Loans	$	19,418	$	20,254		$	57,365	$	60,636
Federal funds sold	31		313			51		452
Mortgage loans held for sale	105		39			286		187
Securities – taxable	1,392		1,423			4,000		3,625
Securities – tax-exempt	279		259			837		743
Total interest income	21,225		22,288			62,539		65,643
Interest expense:
Deposits	4,616		6,342			13,953		19,003
Securities sold under agreements to repurchase and federal funds purchased	91		274			237		1,004
Other short-term borrowings	—		169			—		396
Federal Home Loan Bank advances	917		1,037			2,565		3,096
Subordinated debentures	884		1			2,642		3
Total interest expense	6,508		7,823			19,397		23,502
Net interest income	14,717		14,465			43,142		42,141
Provision for loan losses	3,475		900			7,300		3,100
Net interest income after provision for loan losses	11,242		13,565			35,842		39,041
Non-interest income:
Investment management and trust services	2,731		2,883			8,203		9,400
Service charges on deposit accounts	2,120		2,196			5,969		6,305
Bankcard transaction revenue	745		662			2,151		1,974
Gains on sales of mortgage loans held for sale	667		244			1,610		999
Loss on sales of securities available for sale	—		(607		)	—		(607		)
Brokerage commissions and fees	436		415			1,258		1,298
Bank owned life insurance income	249		263			737		773
Other	1,284		580			2,929		1,628
Total non-interest income	8,232		6,636			22,857		21,770
Non-interest expenses:
Salaries and employee benefits	7,569		6,880			22,638		21,608
Net occupancy expense	1,091		1,121			3,112		3,166
Data processing expense	1,091		1,034			3,370		3,015
Furniture and equipment expense	316		290			915		842
State bank taxes	428		340			1,290		994
FDIC insurance expense	471		176			2,138		440
Other	2,093		2,141			5,895		6,319
Total non-interest expenses	13,059		11,982			39,358		36,384
Income before income taxes	6,415		8,219			19,341		24,427
Income tax expense	2,016		2,776			5,917		7,817
Net income	$	4,399	$	5,443		$	13,424	$	16,610
Net income per share:
Basic	$	0.32	$	0.41		$	0.99	$	1.24
Diluted	$	0.32	$	0.40		$	0.98	$	1.22
Average common shares:
Basic	13,584		13,435			13,550		13,432
Diluted	13,702		13,652			13,694		13,615

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 nine months ended September 30, 2009 and 2008

(In thousands)

	2009			2008
Operating activities:
Net income	$	13,424		$	16,610
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	7,300			3,100
Depreciation, amortization and accretion, net	1,799			1,884
Deferred income tax benefit	(1,762		)	(630		)
Loss on sale of securities available for sale	—			607
Gains on sales of mortgage loans held for sale	(1,610		)	(999		)
Origination of mortgage loans held for sale	(188,512		)	(76,633		)
Proceeds from sale of mortgage loans held for sale	187,952			80,187
Bank owned life insurance income	(737		)	(773		)
Increase in value of private investment fund	(559		)	—
Gain (loss) on the sale of other real estate	2			(3		)
Stock compensation expense	509			534
Excess tax benefits from share-based compensation arrangements	(123		)	(108		)
Reversal of valuation of mortgage servicing rights	(176		)	—
Increase in accrued interest receivable and other assets	(386		)	(72		)
Increase in accrued interest payable and other liabilities	300			1,471
Net cash provided by operating activities	17,421			25,175
Investing activities:
Purchases of securities available for sale	(187,081		)	(243,762		)
Proceeds from sale of securities available for sale	—			3,344
Proceeds from maturities of securities available for sale	126,869			197,674
Proceeds from maturities of securities held to maturity	6			1,084
Net increase in loans	(66,016		)	(117,649		)
Purchases of premises and equipment	(2,363		)	(2,940		)
Proceeds from sale of other real estate	251			1,907
Net cash used in investing activities	(128,334		)	(160,342		)
Financing activities:
Net increase in deposits	90,826			159,259
Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased	14,314			(10,179		)
Net increase in other short-term borrowings	240			4,770
Proceeds from Federal Home Loan Bank advances	20,460			—
Repayments of Federal Home Loan Bank advances	(4		)	—
Proceeds from issuance of subordinated debentures	—			10,000
Repayments of subordinated debentures	(30		)	(30		)
Issuance of common stock for options and dividend reinvestment plan	1,446			1,085
Excess tax benefits from share-based compensation arrangements	123			108
Common stock repurchases	(300		)	(5,382		)
Cash dividends paid	(6,900		)	(6,677		)
Net cash provided by financing activities	120,175			152,954
Net increase in cash and cash equivalents	9,262			17,787
Cash and cash equivalents at beginning of period	27,113			39,329
Cash and cash equivalents at end of period	$	36,375		$	57,116
Supplemental cash flow information:
Income tax payments	$	6,855		$	6,010
Cash paid for interest	19,452			23,661
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	633		$	1,161

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 nine months ended September 30, 2009

(In thousands, except per share data)

												Accumulated
	Common stock											other
	Number of					Additional			Retained			comprehensive
	shares		Amount			paid-in capital			earnings			income		Total
Balance December 31, 2008	13,474		$	5,802		$	7,485		$	128,923		$	2,290	$	144,500
Net income	—		—			—			13,424			—		13,424

Change in accumulated other comprehensive income, net of tax	—		—			—			—			485		485

Stock compensation expense	—		—			509			—			—		509

Stock issued for stock options exercised and dividend reinvestment plan	101		338			1,231			—			—		1,569

Stock issued for non-vested restricted stock	26		85			480			(565		)	—		—

Cash dividends, $0.51 per share	—		—			—			(6,922		)	—		(6,922		)

Shares repurchased or cancelled	(13	)	(42		)	(271		)	13			—		(300		)

Balance September 30, 2009	13,588		$	6,183		$	9,434		$	134,873		$	2,775	$	153,265

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 nine months ended September 30, 2009 and 2008

(In thousands)

	Three months ended					Nine months ended
	September 30,					September 30,
	2009		2008			2009		2008
Net income	$	4,399	$	5,443		$	13,424	$	16,610
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 $712, ($173), $261 and ($333), respectively)	1,323		(323		)	485		(619		)
Reclassification adjustment for securities losses realized in income (net of tax of $0, $212, $0, and $212, respectively)	—		395			—		395
Other comprehensive income (loss)	1,323		72			485		(224		)
Comprehensive income	$	5,722	$	5,515		$	13,909	$	16,386

See accompanying notes to unaudited condensed consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

(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 nine month periods ended September 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:

September 30, 2009	Amortized		Unrealized
Securities available for sale	Cost		Gains		Losses		Fair Value
(in thousands)

U.S. Treasury and other U.S. government obligations	$	2,999	$	54	$	—	$	3,053
Government sponsored enterprise obligations	114,523		2,327		—		116,850
Total government securities	117,522		2,381		—		119,903

Mortgage-backed securities - GNMA	57,770		1,400		127		59,043
Mortgage-backed securities - government agencies	16,635		289		—		16,924
Total mortgage-backed securities	74,405		1,689		127		75,967

Obligations of states and political subdivisions	33,451		1,025		95		34,381
Trust preferred securities of financial institutions	3,233		—		261		2,972

Total securities available for sale	$	228,611	$	5,095	$	483	$	233,223

December 31, 2008	Amortized		Unrealized
Securities available for sale	Cost		Gains		Losses		Fair Value
(in thousands)
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:

September 30, 2009	Amortized		Unrealized				Fair
Securities held to maturity	Cost		Gains		Losses		Value
(in thousands)

Mortgage-backed securities - government agencies	$	37	$	2	$	—	$	39

	$	37	$	2	$	—	$	39

December 31, 2008	Amortized		Unrealized				Fair
Securities held to maturity	Cost		Gains		Losses		Value
(in thousands)

Mortgage-backed securities - government agencies	$	43	$	1	$	—	$	44

	$	43	$	1	$	—	$	44

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

					Unrealized
Federal Home Loan Bank stock and other securities	Cost		Fair Value		Gain/(Loss)
(in thousands)

Federal Home Loan Bank stock	$	4,546	$	4,546	$	—
Other securities	1,001		1,001		—
Total Federal Home Loan Bank stock and other securities	$	5,547	$	5,547	$	—

The other securities consist of non-marketable preferred stock of a non-profit corporation whose goal is to ensure the safety, security and protection of nursing home and senior housing residents against all aspects of crime. The investment was made as part of the Company’s community reinvestment efforts and matures in 2014. It is fully collateralized by the corporation with a government agency security of similar duration.

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

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

Due within one year	$	80,070	$	80,256	$	—	$	—
Due within one year through five years	41,314		42,695		—		—
Due within five years through ten years	35,032		36,762		27		28
Due after ten years	72,195		73,510		10		11

	$	228,611	$	233,223	$	37	$	39

Securities with unrealized losses at September 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

September 30, 2009
Mortgage-backed securities - GNMA	$	23,658	$	127	$	—	$	—	$	23,658	$	127
Obligations of states and political subdivisions	6,767		95		—		—		6,767		95
Trust preferred securities of financial institutions	1,888		96		1,085		165		2,973		261

Total temporarily impaired securities	$	32,313	$	318	$	1,085	$	165	$	33,398	$	483

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. Bancorp does not consider those investments to be other-than-temporarily impaired at September 30, 2009.

Debt securities with gross unrealized losses consist of 13 and 18 separate investment positions as of September 30, 2009 and December 31, 2008, respectively.

As of September 30, 2009, Bancorp had 2 securities with a total carrying value of $1,085,000 which were impaired for 12 months or longer. These are trust preferred securities with a total amortized cost of $1,250,000 and an unrealized loss totaling $165,000 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 September 30, 2009, management is of the opinion that none of the securities is other than temporarily impaired. Management does not intend to sell the investments, and it is not more likely than not that Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. Volatility in capital markets subsequent to September 30, 2009 could give rise to other-than-temporary impairment in the future.

(c) Stock-Based Compensation

Under Generally Accepted Accounting Principals (“GAAP”), 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 September 30, 2009, there were 177,325 shares available for future awards. Bancorp’s 1995 Stock Incentive Plan expired in 2005; however, options granted under this plan expire as late as 2015. Options and stock appreciation rights (SARs) granted generally have been subject to a vesting schedule of 20% per year. 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.

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Bancorp recognized, within salaries and employee benefits in the consolidated statements of income, stock-based compensation expense of $181,000 and $171,000 and a deferred tax benefit of $63,000 and $60,000 resulting in a reduction of net income of $118,000 and $111,000 for the third quarter of 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, Bancorp recognized $509,000 and $534,000 of compensation expense, a deferred tax benefit of $178,000 and $187,000, and a reduction of net income of $331,000 and $347,000, respectively. Bancorp expects to record an additional $182,000 of stock-based compensation expense in 2009. As of September 30, 2009 Bancorp has $1,977,000 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 $897,000 and $1,035,000 from the exercise of options during the first nine months of 2009 and 2008, respectively.

As required, Bancorp reduces 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 at grant date:

	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 evaluates 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 nine months ended September 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	(91	)	9.82-18.62	13.11		982		2.54
Forfeited	(8	)	22.14-26.83	24.56		—		5.45

At September 30, 2009
Vested and exercisable	753		9.82-26.83	20.20		2,601		4.45		4.54
Unvested	277		20.90-26.83	23.81		96		5.41		8.18
Total outstanding	1,030		9.82-26.83	21.17		$	2,697	4.71		5.52

Vested during quarter	—		—	—		$	—	—

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) Allowance for Loan Losses and Impaired Loans

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

	2009			2008
Beginning balance January 1,	$	15,381		$	13,450
Provision for loan losses	7,300			3,100
Loans charged off	(3,317		)	(2,310		)
Recoveries	475			545
Ending balance September 30,	$	19,839		$	14,785

Information about impaired loans follows (in thousands):

	Nine months ended		Year ended
	September 30, 2009		December 31, 2008
Principal balance of impaired loans	$	7,927	$	4,455
Impaired loans with a valuation allowance	4,984		2,724
Amount of valuation allowance	1,247		1,255
Impaired loans with no valuation allowance	2,943		1,731
Average balance of impaired loans for the period	5,954		4,054

(3) Federal Home Loan Bank Advances

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

Amount

Type

Amortization

Maturity

Call Feature

Next Call Date

30,000

Fixed rate

None

November 2009

Non callable

20,000

Fixed rate

None

December 2010

Quarterly

December 2009

20,000

Fixed rate

None

May 2012

Quarterly

November 2009

10,000

Fixed rate

None

April 2012

Non callable

10,000

Fixed rate

None

April 2014

Non callable

456

Fixed rate

15 Year

April 2024

Non callable

90,456

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 September 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 $81.9 million as of September 30, 2009 under terms to be established at the

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time of the advance. The Bank also has a standby letter of credit from the FHLB for $20 million outstanding at September 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 deposit accounts to be backed by some form of collateral above the per account protection provided by the FDIC (currently $250,000 per account). The standby letter of credit from the FHLB collateralizes these accounts beyond the FDIC protection as required by Kentucky law.

(4) Goodwill

GAAP 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 actuarially determined pension costs are expensed and accrued over the service period, and benefits are paid from the Bank’s assets. The Bank maintains life insurance policies on certain current and former executives, the proceeds from which will help to offset the cost of benefits. Information about the components of the net periodic benefit cost of the defined benefit plan follows:

	Three months ended September 30				Nine months ended September 30
(in thousands)	2009		2008		2009		2008
Components of net periodic benefit cost:
Service cost	$	—	$	—	$	—	$	—
Interest cost	26		27		79		82
Expected return on plan assets	—		—		—		—
Amortization of prior service cost	—		—		—		—
Amortization of the net loss	6		6		18		18
Net periodic benefit cost	$	32	$	33	$	97	$	100

(6) Commitments and Contingent Liabilities

As of September 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 $336,712,000 including standby letters of credit of $28,894,000 represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of September 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.

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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 mainly 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.

The Company has commercial customers who entered into interest rate swap agreements with another financial institution to manage their own interest rate risk. The Company assisted two customers by guaranteeing performance of the swaps with the other financial institutions. Accordingly, the Company entered into risk participation agreements as a guarantor. The agreement stipulates that, in the event of default by the Bank’s customer on the interest rate swap, the Company will reimburse a portion of the loss, if any, borne by the other financial institution. These interest rate swaps are normally collateralized — generally with real property, inventories and equipment — by the customer, which limits the Company’s credit risk associated with the agreements. The terms of the agreements range from 19 to 41 months. The maximum potential future payment guaranteed by the Company cannot be readily estimated, because it is dependent upon the fair value of the interest rate swaps at the time of default. If an event of default on all contracts had occurred at September 30, 2009, the Company would have been required to make payments of approximately $444,000. Management believes the unamortized fee income of $23,000 materially approximates the fair value of these guarantees.

In the third quarter of 2009, the Company executed an agreement to acquire marketing rights for a new sports and entertainment venue. Under the agreement, the Company will pay $400,000 per year from 2010 through 2019. The Company expects to receive revenue from the relationship which will significantly offset the expenses over the term of the agreement.

(7) Preferred Stock

In 2003, Bancorp’s 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 September 30, 2009.

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(8) Net Income Per Share

The following table reflects, for the three and nine months ended September 30, 2009 and 2008, net income (the numerator) and average shares outstanding (the denominator) for the basic and diluted net income per share computations:

	Three months ended				Nine months ended
	September 30				September 30
(in thousands except per share data)	2009		2008		2009		2008
Net income, basic and diluted	$	4,399	$	5,443	$	13,424	$	16,610
Average shares outstanding	13,584		13,435		13,550		13,432
Effect of dilutive securities	118		217		144		183

Average shares outstanding including including dilutive securities	13,702		13,652		13,694		13,615

Net income per share, basic	$	0.32	$	0.41	$	0.99	$	1.24
Net income per share, diluted	$	0.32	$	0.40	$	0.98	$	1.22

(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 individuals, 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, retirement plan services and financial planning.

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 since all activity giving rise to the difference between marginal and effective tax rates occurs in the commercial banking segment. 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 nine month periods ended September 30, 2009 and 2008 follows:

	Three months				Nine months
	ended September 30				ended September 30
(In thousands)	2009		2008		2009		2008

Net interest income:
Commercial banking	$	14,659	$	14,384	$	42,937	$	41,893
Investment management and trust	58		81		205		248
Total	$	14,717	$	14,465	$	43,142	$	42,141

Provision for loan losses:
Commercial banking	$	3,475	$	900	$	7,300	$	3,100
Investment management and trust	—		—		—		—
Total	$	3,475	$	900	$	7,300	$	3,100

Non-interest income:
Commercial banking	$	5,501	$	3,753	$	14,654	$	12,370
Investment management and trust	2,731		2,883		8,203		9,400
Total	$	8,232	$	6,636	$	22,857	$	21,770

Non-interest expense:
Commercial banking	$	11,532	$	10,518	$	34,606	$	31,831
Investment management and trust	1,527		1,464		4,752		4,553
Total	$	13,059	$	11,982	$	39,358	$	36,384

Tax expense
Commercial banking	$	1,574	$	2,253	$	4,637