Edgar Filing: S Y BANCORP INC

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, 2010

¨	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 ¨ 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 ¨ No x

The number of shares of the registrant’s Common Stock, no par value, outstanding as of July 29, 2010, was 13,702,339.

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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, 2010 and December 31, 2009

–	Unaudited Condensed Consolidated Statements of Income
	for the three and six months ended June 30, 2010 and 2009

–	Unaudited Condensed Consolidated Statements of Cash Flows
	for the six months ended June 30, 2010 and 2009

–	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity
	for the six months ended June 30, 2010

–	Unaudited Condensed Consolidated Statements of Comprehensive Income
	for the three and six months ended June 30, 2010 and 2009

–	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

June 30, 2010 and December 31, 2009

(In thousands, except share data)

	(Unaudited)
	June 30,		December 31,
	2010		2009
Assets
Cash and due from banks	$	32,171	$	25,773
Federal funds sold	42,649		6,651
Mortgage loans held for sale	6,763		13,249
Securities available for sale (amortized cost of $205,396 in 2010 and $224,488 in 2009)	211,731		228,225
Securities held to maturity (fair value of $27 in 2010 and $37 in 2009)	25		35
Federal Home Loan Bank stock and other securities	5,772		5,547
Loans	1,477,304		1,435,462
Less allowance for loan losses	22,933		20,000
Net loans	1,454,371		1,415,462
Premises and equipment, net	28,143		28,016
Bank owned life insurance	25,621		25,130
Accrued interest receivable	5,953		5,745
Other assets	46,279		37,646
Total assets	$	1,859,478	$	1,791,479
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	250,427	$	211,352
Interest bearing	1,223,404		1,206,832
Total deposits	1,473,831		1,418,184
Securities sold under agreements to repurchase	53,759		51,321
Federal funds purchased	18,437		19,518
Other short-term borrowings	1,483		1,809
Accrued interest payable	455		427
Other liabilities	38,130		45,223
Federal Home Loan Bank advances	70,448		60,453
Subordinated debentures	40,900		40,930
Total liabilities	1,697,443		1,637,865
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 13,695,379 and 13,606,532 shares in 2010 and 2009, respectively	6,540		6,244
Additional paid-in capital	11,409		9,729
Retained earnings	140,200		135,442
Accumulated other comprehensive income	3,886		2,199
Total stockholders’ equity	162,035		153,614
Total liabilities and stockholders’ equity	$	1,859,478	$	1,791,479

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, 2010 and 2009

(In thousands, except per share data)

	For three months ended				For six months ended
	June 30,				June 30,
	2010		2009		2010		2009
Interest income:
Loans	$	19,715	$	19,204	$	38,929	$	37,947
Federal funds sold	19		17		44		20
Mortgage loans held for sale	53		105		119		181
Securities — taxable	1,376		1,187		2,780		2,608
Securities — tax-exempt	285		284		533		558
Total interest income	21,448		20,797		42,405		41,314
Interest expense:
Deposits	3,394		4,664		7,076		9,337
Fed funds purchased	8		16		17		38
Securities sold under agreements to repurchase	81		49		168		108
Federal Home Loan Bank advances	556		868		1,081		1,648
Subordinated debentures	862		883		1,722		1,758
Total interest expense	4,901		6,480		10,064		12,889
Net interest income	16,547		14,317		32,341		28,425
Provision for loan losses	2,384		2,200		5,079		3,825
Net interest income after provision for loan losses	14,163		12,117		27,262		24,600
Non-interest income:
Investment management and trust services	3,232		2,801		6,493		5,472
Service charges on deposit accounts	2,119		2,038		4,003		3,849
Bankcard transaction revenue	863		747		1,614		1,406
Gains on sales of mortgage loans held for sale	445		444		830		943
Brokerage commissions and fees	503		437		959		822
Bank owned life insurance income	248		245		491		488
Other	576		1,352		1,629		1,645
Total non-interest income	7,986		8,064		16,019		14,625
Non-interest expenses:
Salaries and employee benefits	8,319		7,669		16,408		15,069
Net occupancy expense	1,296		1,013		2,572		2,021
Data processing expense	1,322		1,248		2,459		2,279
Furniture and equipment expense	321		307		635		599
FDIC insurance expense	531		1,245		1,002		1,667
Other	2,655		2,548		5,183		4,664
Total non-interest expenses	14,444		14,030		28,259		26,299
Income before income taxes	7,705		6,151		15,022		12,926
Income tax expense	2,149		1,863		4,485		3,901
Net income	$	5,556	$	4,288	$	10,537	$	9,025
Net income per share:
Basic	$	0.41	$	0.32	$	0.77	$	0.67
Diluted	$	0.40	$	0.31	$	0.77	$	0.66
Average common shares:
Basic	13,690		13,564		13,668		13,532
Diluted	13,790		13,729		13,752		13,683

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, 2010 and 2009

(In thousands)

	2010			2009
Operating activities:
Net income	$	10,537		$	9,025
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	5,079			3,825
Depreciation, amortization and accretion, net	1,653			1,009
Deferred income tax benefit	(1,184		)	(848		)
Gain on sales of mortgage loans held for sale	(830		)	(943		)
Origination of mortgage loans held for sale	(54,494		)	(139,441		)
Proceeds from sale of mortgage loans held for sale	61,810			127,875
Bank owned life insurance income	(491		)	(488		)
Decrease in value of private investment fund	(368		)	(142		)
Loss on the sale of premises and equipment	2			—
(Loss) gain on the sale of other real estate	(51		)	2
Stock compensation expense	455			328
Excess tax benefits from share-based compensation arrangements	(48		)	(98		)
Reversal of valuation of mortgage servicing rights	—			(176		)
(Increase) decrease in accrued interest receivable and other assets	(7,804		)	1,336
Increase in accrued interest payable and other liabilities	11,257			851
Net cash provided by operating activities	25,523			2,115
Investing activities:
Purchases of securities available for sale	(91,798		)	(116,082		)
Proceeds from maturities of securities available for sale	110,259			64,032
Proceeds from maturities of securities held to maturity	10			4
Net increase in loans	(63,540		)	(51,731		)
Purchases of premises and equipment	(1,353		)	(723		)
Proceeds from disposal of premises and equipment	3			—
Proceeds from sale of other real estate	887			58
Net cash used in investing activities	(45,532		)	(104,442		)
Financing activities:
Net increase in deposits	55,647			66,088
Net increase in securities sold under agreements to repurchase and federal funds purchased	1,357			25,599
Net (decrease) increase in other short-term borrowings	(326		)	585
Proceeds from Federal Home Loan Bank advances	10,000			20,460
Repayments of Federal Home Loan Bank advances	(5		)	(2		)
Repayments of subordinated debentures	(30		)	(30		)
Issuance of common stock for options and dividend reinvestment plan	442			1,060
Excess tax benefits from share-based compensation arrangements	48			98
Common stock repurchases	(79		)	(296		)
Cash dividends paid	(4,649		)	(4,589		)
Net cash provided by financing activities	62,405			108,973
Net increase in cash and cash equivalents	42,396			6,646
Cash and cash equivalents at beginning of period	32,424			27,113
Cash and cash equivalents at end of period	$	74,820		$	33,759
Supplemental cash flow information:
Income tax payments	$	4,080		$	4,495
Cash paid for interest	10,036			12,995
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	1,364		$	60

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, 2010

(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, 2009	13,607		$	6,244		$	9,729		$	135,442		$	2,199	$	153,614

Net income	—		—			—			10,537			—		10,537

Change in accumulated other comprehensive income, net of tax	—		—			—			—			1,687		1,687

Stock compensation expense	—		—			455			—			—		455

Stock issued for stock options exercised and dividend reinvestment plan	44		149			461			—			—		610

Stock issued for non-vested restricted stock	54		181			961			(1,142		)	—		—

Cash dividends, $0.34 per share	—		—			—			(4,669		)	—		(4,669		)

Shares repurchased or cancelled	(10	)	(34		)	(197		)	32			—		(199		)

Balance June 30, 2010	13,695		$	6,540		$	11,409		$	140,200		$	3,886	$	162,035

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, 2010 and 2009

(In thousands)

	Three months ended					Six months ended
	June 30,					June 30,
	2010		2009			2010		2009
Net income	$	5,556	$	4,288		$	10,537	$	9,025
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized gains (losses) arising during the period (net of tax of $598, ($58), $908 and ($451), respectively)	1,110		(108		)	1,687		(838		)
Other comprehensive income (loss)	1,110		(108		)	1,687		(838		)
Comprehensive income	$	6,666	$	4,180		$	12,224	$	8,187

See accompanying notes to unaudited condensed consolidated financial statements.

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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 (US GAAP) for complete financial statements. The consolidated financial statements of S.Y. Bancorp, Inc. (“Bancorp”) and its subsidiary reflect all adjustments (consisting only of adjustments of a normal recurring nature) which are, in the opinion of management, necessary for a fair presentation of financial condition and results of operations for the interim periods.

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

A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2009 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. Bancorp has evaluated subsequent events for recognition or disclosure up to the date on which financial statements were issued.

Interim results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results for the entire year.

Critical Accounting Policies

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

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

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S.Y. BANCORP, INC. AND SUBSIDIARY

(2) Securities

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

June 30, 2010	Amortized		Unrealized
Securities available for sale	Cost		Gains		Losses		Fair Value
(in thousands)

Government sponsored enterprise obligations	$	102,084	$	3,098	$	—	$	105,182
Mortgage-backed securities	56,312		2,487		—		58,799
Obligations of states and political subdivisions	45,750		915		100		46,565
Trust preferred securities of financial institutions	1,250		—		65		1,185

Total securities available for sale	$	205,396	$	6,500	$	165	$	211,731

December 31, 2009	Amortized		Unrealized
Securities available for sale	Cost		Gains		Losses		Fair Value
(in thousands)

U.S. Treasury and other U.S. government obligations	$	3,000	$	19	$	—	$	3,019
Government sponsored enterprise obligations	122,761		2,006		79		124,688
Mortgage-backed securities	65,179		1,519		17		66,681
Obligations of states and political subdivisions	32,298		689		175		32,812
Trust preferred securities of financial institutions	1,250		—		225		1,025

Total securities available for sale	$	224,488	$	4,233	$	496	$	228,225

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S.Y. BANCORP, INC. AND SUBSIDIARY

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

June 30, 2010	Amortized		Unrealized				Fair
Securities held to maturity	Cost		Gains		Losses		Value
(in thousands)

Mortgage-backed securities	$	25	$	2	$	—	$	27

December 31, 2009	Amortized		Unrealized				Fair
Securities held to maturity	Cost		Gains		Losses		Value
(in thousands)

Mortgage-backed securities	$	35	$	2	$	—	$	37

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

	June 30,		December 31,
Federal Home Loan Bank stock and other securities	2010		2009
(in thousands)

Federal Home Loan Bank stock	$	4,771	$	4,546
Other securities	1,001		1,001
Total Federal Home Loan Bank stock and other securities	$	5,772	$	5,547

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S.Y. BANCORP, INC. AND SUBSIDIARY

A summary of securities as of June 30, 2010 based on contractual maturity is presented below. Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations.

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

Due within one year	$	26,426	$	26,462	$	—	$	—
Due within one year through five years	80,001		82,438		—		—
Due within five years through ten years	39,043		40,419		24		25
Due after ten years	59,926		62,412		1		2

	$	205,396	$	211,731	$	25	$	27

Securities with unrealized losses at June 30, 2010 and December 31, 2009, 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, 2010
Government sponsored enterprise obligations	$	—	$	—	$	—	$	—	$	—	—
Obligations of states and political subdivisions	9,303		71		2,053		29		11,356		100
Trust preferred securities of financial institutions	—		—		1,185		65		1,185		65

Total temporarily impaired securities	$	9,303	$	71	$	3,238	$	94	$	12,541	$	165

December 31, 2009
Government sponsored enterprise obligations	$	13,402	$	79	$	—	$	—	$	13,402	$	79
Mortgage-backed securities	9,692		17		—		—		9,692		17
Obligations of states and political subdivisions	8,084		175		—		—		8,084		175
Trust preferred securities of financial institutions	—		—		1,025		225		1,025		225

Total temporarily impaired securities	$	31,178	$	271	$	1,025	$	225	$	32,203	$	496

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S.Y. BANCORP, INC. AND SUBSIDIARY

The investment portfolio includes a significant level of obligations of states and political subdivisions. The issuers of the bonds are generally school districts or essential-service public works projects. The bonds are 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 likely 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. These investments consist of 22 and 14 separate investment positions as of June 30, 2010 and December 31, 2009 that are not considered other-than-temporarily impaired. Based on these detailed reviews, Bancorp has not recorded other-than-temporary losses on any securities held at June 30, 2010.

As of June 30, 2010, Bancorp had four securities with a total carrying value of $3,238,000 which had been impaired for 12 months or longer. Two of these are obligations of a large school district in Kentucky with a total amortized cost of $2,082,000 and an unrealized loss totaling $29,000 caused by interest rate changes and other market conditions. The remaining two are trust preferred securities with a total amortized cost of $1,250,000 and an unrealized loss totaling $65,000 caused by interest rate changes and other market conditions. As of June 30, 2010, one of the trust preferred securities has a credit rating below investment grade — Caa1 by Moody’s Investor Service. This security has an amortized cost of $1,000,000, a carrying value of $959,600, and an unrealized loss of $40,400. 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, 2010, 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 likely that Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

(3) Stock-Based Compensation

The fair value of all new and modified awards granted, net of estimated forfeitures, is recognized as compensation expense. These forfeiture estimates are based on historical experience.

Bancorp currently has one stock-based compensation plan. Initially, in the 2005 Stock Incentive Plan, there were 735,000 shares of common stock reserved for issuance of stock based awards. At Bancorp’s Annual Meeting of Shareholders held on April 21, 2010, shareholders approved a proposal to amend the 2005 Stock Incentive Plan to reserve an additional 700,000 shares of common stock for issuance under the plan. As of June 30, 2010, there were 763,680 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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S.Y. BANCORP, INC. AND SUBSIDIARY

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

	For three months ended				For six months ended
	June 30,				June 30,
	2010		2009		2010		2009
Stock-based compensation expense before income taxes	$	247,200	$	179,900	$	455,200	$	328,200
Deferred tax benefit	86,500		63,000		159,300		114,900
Reduction of net income	$	160,700	$	116,900	$	295,900	$	213,300

Bancorp expects to record an additional $498,000 of stock-based compensation expense in 2010. As of June 30, 2010, Bancorp has $2,862,000 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 $429,000 and $808,000 from the exercise of options during the first six months of 2010 and 2009, respectively.

The fair value of Bancorp’s stock options and SARs is estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options. This model requires the input of subjective assumptions, changes to which can materially affect the fair value estimate. The fair value of restricted shares is determined by Bancorp’s closing stock price on the date of grant. The following assumptions were used in SAR/option valuations at the grant date in each year:

	2010		2009

Dividend yield	2.18	%	2.11	%
Expected volatility	23.87		23.59
Risk free interest rate	3.57		3.11
Forfeitures	5.96		5.96
Expected life of options and SARs (in years)	7.6		7.7

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 is the volatility of the underlying shares for the expected term on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the awards.

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S.Y. BANCORP, INC. AND SUBSIDIARY

A summary of stock option and SARs activity and related information for the six months ended June 30, 2010 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, 2009
Vested and exercisable	730		$	9.82-26.83	$	20.50	$	1,664	$	4.52	4.42
Unvested	276		20.90-26.83		23.81		—		5.41		7.93
Total outstanding	1,006		9.82-26.83		21.41		1,664		4.76		5.38

Granted	85		21.03		21.03		166		5.31
Exercised	(44	)	9.82-22.81		12.40		445		2.54
Forfeited	(10	)	22.14-26.83		23.91		2		5.41

At June 30, 2010
Vested and exercisable	763		9.82-26.83		21.33		1,811		4.73		4.38
Unvested	274		21.03-26.83		22.85		231		5.36		8.23
Total outstanding	1,037		9.82-26.83		21.73		$	2,042	4.90		5.40

Vested during quarter	—		—		—		$	—	—

The aggregate intrinsic value of stock options exercised was calculated as the difference in the closing price of Bancorp’s common shares on the date of exercise and the exercise price, multiplied by the number of shares exercised.

The weighted average fair values of options and SARs granted in 2010 and 2009 were $5.31 and $5.36, respectively.

In the first quarter of 2010, Bancorp granted 84,558 SARs at the current market price of $21.03 and a fair value of $5.31. Also, in the first quarter of 2010, Bancorp granted 54,292 shares of common stock at the current market price of $21.03. No SARs or common stock grants were awarded in the second quarter of 2010.

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(4) Allowance for Loan Losses and Impaired Loans

An analysis of the changes in the allowance for loan losses for the six months ended June 30, 2010 and 2009 follows (in thousands):

	2010			2009
Beginning balance January 1,	$	20,000		$	15,381
Provision for loan losses	5,079			3,825
Loans charged off	(2,560		)	(2,458		)
Recoveries	414			329
Ending balance June 30,	$	22,933		$	17,077

Information about impaired loans follows (in thousands):

	June 30, 2010		December 31, 2009
Principal balance of impaired loans	$	13,187	$	11,208
Impaired loans with a valuation allowance	8,715		8,688
Amount of valuation allowance	1,685		1,676
Impaired loans with no valuation allowance	4,472		2,520
Average balance of impaired loans for the period	12,505		7,005

(5) Federal Home Loan Bank Advances

The Bank had outstanding borrowings of $70.5 million, at June 30, 2010, comprised of six separate advances as detailed in the table below (in thousands).

Amount

Type

Amortization

Maturity

Call Feature

Next Call Date

20,000

Fixed rate

None

December 2010

Quarterly

June 2010

20,000

Fixed rate

None

May 2012

Quarterly

May 2010

10,000

Fixed rate

None

April 2012

Non callable

10,000

Fixed rate

None

April 2014

Non callable

10,000

Fixed rate

None

May 2014

Non callable

448

Fixed rate

15 Year

April 2024

Non callable

70,448

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 3.33% at June 30, 2010. 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 $129.8 million as of June 30, 2010 under terms to be established at the time of the advance. The Bank also has a standby letter of credit from the FHLB for $10 million outstanding at June 30, 2010. 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 $250,000 per account protection provided by the FDIC. The

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standby letter of credit from the FHLB collateralizes these accounts beyond the FDIC protection as required by Kentucky law.

(6) Goodwill and Intangible Assets

US GAAP requires that goodwill and intangible assets with indefinite useful lives 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.

Mortgage servicing rights (MSRs) are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. MSRs are evaluated quarterly for impairment by comparing the carrying value to the fair value. The estimated fair values of MSRs at June 30, 2010 and December 31, 2009 were $1,762,000 and $2,475,000, respectively. The total outstanding principal balances of loans serviced for others were $212,640,000 and $194,414,000 at June 30, 2010, and December 31, 2009 respectively. Changes in the net carrying amount of MSRs for the six months ended June 30, 2010 and 2009 are shown in the following table.

(in thousands)	2010			2009
Balance at beginning of period	$	1,616		$	426
Originations	257			633
Amortization	(236		)	(95		)
Impairment reversal	—			176
Balance at June 30	$	1,637		$	1,140

(7) 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 income from which will help to offset the cost of benefits. The net periodic benefits costs, which include interest cost and amortization of net losses, totaled $31,000 and $32,000 for the three months ended June 30, 2010 and 2009, respectively. For the six months ended June 30, 2010 and 2009, the net periodic benefit costs totaled $62,000 and $64,000, respectively.

(8) Commitments and Contingent Liabilities

As of June 30, 2010, 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 $360,328,000 including standby letters of credit of $16,673,000 represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of June 30, 2010. Commitments to extend credit were $379,075,000, including letters of credit of $26,655,000, as of December 31, 2009. 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. Standby letters of credit generally have maturities of up to five years.

Bancorp has commercial customers who entered into interest rate swap agreements with another financial institution to manage their own interest rate risk. Bancorp assisted two customers by guaranteeing performance of the swaps with the other financial institutions. Accordingly, Bancorp 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, Bancorp 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 Bancorp’s credit risk associated with the agreements. The terms of the agreements range from 10 to 32 months. The maximum potential future payment guaranteed by Bancorp 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 June 30, 2010, Bancorp would have been required to make payments of approximately $362,000. Management believes the unamortized fee income of $15,000 recorded in other liabilities materially approximates the fair value of these guarantees.

Bancorp has commercial customers who require international letters of credit for their business needs. Bancorp assisted several customers by guaranteeing performance of the letters of credit with a correspondent financial institution. Accordingly, Bancorp has entered into an agreement whereby Bancorp is ultimately liable for the repayment in the event of non-performance by our customer. The terms of the agreements range from 2 to 10 months. If an event of default on all contracts had occurred at June 30, 2010, Bancorp would have been required to make payments of approximately $2,673,000. These letters of credit are normally collateralized — generally with inventories and receivables — by the customer, which limits Bancorp’s credit risk associated with the agreements.

(9) 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, 2010.

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(10) Net Income Per Share

The following table reflects, for the three ended June 30, 2010 and 2009, net income (the numerator) and average shares outstanding (the denominator) for the basic and diluted net income per share computations:

	Three months ended				Six months ended
	June 30				June 30
	2010		2009		2010		2009
Net income, basic and diluted	$	5,556	$	4,288	$	10,537	$	9,025
Average shares outstanding	13,690		13,564		13,668		13,532
Effect of dilutive securities	100		165		84		151

Average shares outstanding including dilutive securities	13,790		13,729		13,752		13,683

Net income per share, basic	$	0.41	$	0.32	$	0.77	$	0.67
Net income per share, diluted	$	0.40	$	0.31	$	0.77	$	0.66

(11) 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 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, 2010 and 2009 follows:

	Three months				Six Months
	ended June 30				ended June 30
(In thousands)	2010		2009		2010		2009
Net interest income
Commercial banking	$	16,503	$	14,249	$	32,250	$	28,278
Investment management and trust	44		68		91		147
Total	$	16,547	$	14,317	$	32,341	$	28,425
Provision for loan losses:
Commercial banking	$	2,384	$	2,200	$	5,079	$	3,825
Investment management and trust	—		—		—		—
Total	$	2,384	$	2,200	$	5,079	$	3,825
Non-interest income:
Commercial banking	$	4,754	$	5,263	$	9,526	$	9,153
Investment management and trust	3,232		2,801		6,493		5,472
Total	$	7,986	$	8,064	$	16,019	$	14,625
Non-interest expense:
Commercial banking	$	12,519	$	12,327	$	24,516	$	23,074
Investment management and trust	1,925		1,703		3,743		3,225
Total	$	14,444	$	14,030	$	28,259	$	26,299
Tax expense
Commercial banking	$	1,676	$	1,455	$	3,490	$	3,063
Investment management and trust	473		408		995		838
Total	$	2,149	$	1,863	$	4,485	$	3,901
Net income:
Commercial banking	$	4,678	$	3,530	$	8,691	$	7,469
Investment management and trust	878		758		1,846		1,556
Total	$	5,556	$	4,288	$	10,537	$	9,025

(12) Income Taxes

US GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. As of June 30, 2010 and December 31, 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.

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Bancorp’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of June 30, 2010 and December 31, 2009, the amount accrued for the potential payment of interest and penalties was $20,000.

(13) Derivative Financial Instruments

Bancorp typically manages its interest rate risk without the use of hedging instruments, and currently does not have derivative financial instruments employed for any reason except for the accommodation of customers as described below.

Bancorp offers interest rate swaps to customers desiring long-term fixed rate lending whereby Bancorp receives interest at a fixed rate and pays interest at a variable rate. Simultaneously Bancorp enters into an interest rate swap agreement with a correspondent bank whereby Bancorp pays interest at a fixed rate and receives interest at a variable rate. Because of matching terms of offsetting contracts and the collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings.

At June 30, 2010, Bancorp’s interest rate swaps are recognized as other assets and liabilities in the consolidated statements of financial condition at fair value. Bancorp’s derivative instruments have not been designated as hedging instruments. These undesignated derivative instruments are recognized on the consolidated balance sheet at fair value, with changes in fair value, due to changes in prevailing interest rates, recorded in other noninterest income.

The above interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. Bancorp controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations.

At June 30, 2010, two of the outstanding swap agreements have a forward-effective date in the fourth quarter of 2010. The remaining swap agreements had cash flow payments due in the second quarter of 2010. Exchanges of cash flows related to the interest rate swap agreements for the second quarter of 2010 were offsetting and therefore had no effect on Bancorp’s earnings or cash flows.

At June 30, 2010 and December 31, 2009, Bancorp had contracts to make payments at a variable rate determined by a specified index (1 month LIBOR) in exchange for receiving payments at a fixed rate. Correspondingly, at June 30, 2010 and December 31, 2009, Bancorp had contracts to make payments at a fixed rate in exchange for receiving payments at a variable rate determined by a specified index (1 month LIBOR). A summary of the contracts is as follows:

	Receiving						Paying
	June 30,			December 31,			June 30,		December 31,
(dollar amounts in thousands)	2010			2009			2010		2009
Notional amount	$	5,393		$	5,500		$	5,393	$	5,500
Weighted average maturity	8.6			9.1			8.6		9.1
Fair value	$	(332	)	$	(94	)	$	332	$	94

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To reduce credit risk related to the use of derivative instruments, Bancorp obtains collateral. The amount and nature of the collateral obtained is based on Bancorp’s credit evaluation of the customer. In addition, per the terms of the agreement with the correspondent bank, Bancorp may be required to post collateral for swaps with negative fair values and vice versa.

(14) Fair Value Measurements

Bancorp adopted the provisions of the authoritative guidance for fair value measurements. This guidance is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by US GAAP; it does not create or modify any current US GAAP requirements to apply fair value accounting. The guidance prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in US GAAP.

The authoritative guidance 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. The guidance 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 internal 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.

Bancorp’s 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, Bancorp uses its 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.

Bancorp’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.

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Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements are obtained from an outside pricing service. Prices obtained are generally based on dealer quotes, benchmark forward yield curves, and other relevant observable market data. For purposes of potential valuation adjustments to derivative positions, Bancorp evaluates the credit risk of its counterparties as well as its own credit risk. To date, Bancorp has not realized any losses due to a counterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2010.

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

	Fair Value at June 30, 2010
(In thousands)	Total		Level 1		Level 2		Level 3
Assets

Investment securities available for sale

Government sponsored enterprise obligations	$	105,182	$	—	$	105,182	$	—
Mortgage-backed securities	58,799		—		58,799		—
Obligations of states and political subdivisions	46,565		—		46,565		—
Trust preferred securities of financial institutions	1,185		1,185		—		—

Total investment securities available for sale	211,731		1,185		210,546		—