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 September 30, 2012

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

For the transition period from to .

Commission file number 1-13661

S.Y. BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky		61-1137529
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1040 East Main Street, Louisville, Kentucky 40206

(Address of principal executive offices including zip code)

(502) 582-2571

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes o No x

The number of shares of the registrant’s Common Stock, no par value, outstanding as of October 29, 2012, was 13,895,401.

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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:

–	Consolidated Balance Sheets September 30, 2012 (Unaudited) and December 31, 2011

–	Consolidated Statements of Income for the three and nine months ended September 30, 2012 and 2011 (Unaudited)

–	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (Unaudited)

–	Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (Unaudited)

–	Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 (Unaudited)

–	Notes to Unaudited 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

Consolidated Balance Sheets

September 30, 2012 and December 31, 2011

(In thousands, except share data)

	September 30,		December 31,
	2012		2011
	(Unaudited)
Assets
Cash and due from banks	$	35,032	$	32,901
Federal funds sold	17,351		22,019
Mortgage loans held for sale	13,417		4,381
Securities available for sale (amortized cost of $350,586 in 2012 and $343,059 in 2011)	360,946		352,185
Federal Home Loan Bank stock	5,180		4,948
Other securities	1,000		1,001
Loans	1,578,290		1,544,845
Less allowance for loan losses	31,245		29,745
Net loans	1,547,045		1,515,100
Premises and equipment, net	37,436		36,611
Bank owned life insurance	27,886		27,143
Accrued interest receivable	5,954		5,964
Other assets	51,342		50,844
Total assets	$	2,102,589	$	2,053,097
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	359,097	$	313,587
Interest bearing	1,330,933		1,304,152
Total deposits	1,690,030		1,617,739
Securities sold under agreements to repurchase	54,127		66,026
Federal funds purchased	19,308		37,273
Accrued interest payable	202		232
Other liabilities	46,177		42,810
Federal Home Loan Bank advances	60,423		60,431
Subordinated debentures	30,900		40,900
Total liabilities	1,901,167		1,865,411
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 13,894,540 and 13,819,319 shares in 2012 and 2011, respectively	7,204		6,953
Additional paid-in capital	17,046		14,599
Retained earnings	170,908		160,672
Accumulated other comprehensive income	6,264		5,462
Total stockholders’ equity	201,422		187,686
Total liabilities and stockholders’ equity	$	2,102,589	$	2,053,097

See accompanying notes to unaudited consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

For the three and nine months ended September 30, 2012 and 2011

(In thousands, except per share data)

	For three months ended					For nine months ended
	September 30,					September 30,
	2012		2011			2012		2011
Interest income:
Loans	$	19,874	$	19,868		$	59,227	$	59,343
Federal funds sold	82		72			216		167
Mortgage loans held for sale	98		46			217		143
Securities — taxable	1,379		1,319			4,309		3,811
Securities — tax-exempt	259		311			898		1,006
Total interest income	21,692		21,616			64,867		64,470
Interest expense:
Deposits	1,725		2,520			5,652		7,845
Fed funds purchased	8		8			24		31
Securities sold under agreements to repurchase	46		68			138		199
Federal Home Loan Bank advances	345		368			1,072		1,093
Subordinated debentures	773		862			2,341		2,586
Total interest expense	2,897		3,826			9,227		11,754
Net interest income	18,795		17,790			55,640		52,716
Provision for loan losses	2,475		4,100			9,025		9,500
Net interest income after provision for loan losses	16,320		13,690			46,615		43,216
Non-interest income:
Investment management and trust services	3,515		3,347			10,675		10,545
Service charges on deposit accounts	2,161		2,167			6,341		6,125
Bankcard transaction revenue	985		945			2,967		2,782
Gains on sales of mortgage loans held for sale	1,277		574			2,882		1,397
Brokerage commissions and fees	651		570			1,844		1,613
Bank owned life insurance income	226		257			743		761
Other non-interest income	980		(2		)	2,878		792
Total non-interest income	9,795		7,858			28,330		24,015
Non-interest expenses:
Salaries and employee benefits	9,711		7,528			28,189		24,576
Net occupancy expense	1,365		1,314			4,198		3,901
Data processing expense	1,296		1,283			4,131		3,766
Furniture and equipment expense	347		306			965		998
FDIC insurance expense	398		339			1,095		1,299
Other non-interest expense	3,928		2,532			9,711		8,314
Total non-interest expenses	17,045		13,302			48,289		42,854
Income before income taxes	9,070		8,246			26,656		24,377
Income tax expense	2,388		2,472			7,369		7,115
Net income	6,682		5,774			19,287		17,262
Net income per share:
Basic	$	0.48	$	0.42		$	1.39	$	1.25
Diluted	$	0.48	$	0.42		$	1.38	$	1.25
Average common shares:
Basic	13,883		13,799			13,867		13,778
Diluted	13,966		13,838			13,929		13,844

See accompanying notes to unaudited consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2012 and 2011

(In thousands)

	Three months ended				Nine months ended
	September 30,				September 30,
	2012		2011		2012		2011
Net income	$	6,682	$	5,774	$	19,287	$	17,262
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale:
Unrealized gains arising during the period (net of tax of $202, $555, $432 and $1,404, respectively)	375		1,031		802		2,608
Comprehensive income	$	7,057	$	6,805	$	20,089	$	19,870

See accompanying notes to unaudited consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2012 and 2011

(In thousands)

	2012			2011
Operating activities:
Net income	$	19,287		$	17,262
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	9,025			9,500
Depreciation, amortization and accretion, net	3,685			2,943
Deferred income tax benefit	(1,487		)	(1,181		)
Gain on sales of mortgage loans held for sale	(2,882		)	(1,397		)
Origination of mortgage loans held for sale	(166,297		)	(76,270		)
Proceeds from sale of mortgage loans held for sale	160,143			79,042
Bank owned life insurance income	(743		)	(761		)
(Increase) decrease in value of private investment fund	(637		)	703
Proceeds from liquidation of private investment fund	2,846			—
Loss on the disposal of equipment	47			382
Loss on the sale of other real estate	1,177			37
Stock compensation expense	1,118			869
Excess tax benefits from share-based compensation arrangements	(57		)	(87		)
(Increase) decrease in accrued interest receivable and other assets	(1,382		)	3,337
Increase (decrease) in accrued interest payable and other liabilities	3,394			(8,666		)
Net cash provided by operating activities	27,237			25,713
Investing activities:
Purchases of securities available for sale	(330,192		)	(249,429		)
Proceeds from maturities of securities available for sale	321,404			211,106
Proceeds from maturities of securities held to maturity	—			20
Net increase in loans	(44,306		)	(46,435		)
Purchases of premises and equipment	(3,231		)	(6,280		)
Proceeds from disposal of premises and equipment	—			7
Proceeds from sale of foreclosed assets	2,475			5,953
Net cash used in investing activities	(53,850		)	(85,058		)
Financing activities:
Net increase in deposits	72,291			83,092
Net (decrease) increase in securities sold under agreements to repurchase and federal funds purchased	(29,864		)	(2,281		)
Net decrease in other short-term borrowings	—			(733		)
Proceeds from Federal Home Loan Bank advances	30,000			—
Repayments of Federal Home Loan Bank advances	(30,008		)	(8		)
Prepayment penalty on modification of Federal Home Loan Bank advances	(872		)	—
Repayments of subordinated debentures	(10,000		)	—
Issuance of common stock for options and dividend reinvestment plan	585			474
Excess tax benefits from share-based compensation arrangements	57			87
Common stock repurchases	(204		)	(167		)
Cash dividends paid	(7,909		)	(7,441		)
Net cash provided by financing activities	24,076			73,023
Net (decrease) increase in cash and cash equivalents	(2,537		)	13,678
Cash and cash equivalents at beginning of period	54,920			41,655
Cash and cash equivalents at end of period	$	52,383		$	55,333
Supplemental cash flow information:
Income tax payments	$	8,025		$	2,599
Cash paid for interest	9,257			11,903
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	3,336		$	9,828

See accompanying notes to unaudited consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2012

(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, 2011	13,819		$	6,953		$	14,599		$	160,672		$	5,462	$	187,686

Net income	—		—			—			19,287			—		19,287

Other comprehensive income, net of tax	—		—			—			—			802		802

Stock compensation expense	—		—			1,118			—			—		1,118

Stock issued for stock options exercised and dividend reinvestment plan	34		114			529			(2		)	—		641

Stock issued for non-vested restricted stock	57		190			1,108			(1,298		)	—		—

Cash dividends, $0.57 per share	—		—			—			(7,909		)	—		(7,909		)

Shares repurchased or cancelled	(15	)	(53		)	(308		)	158			—		(203		)

Balance September 30, 2012	13,895		$	7,204		$	17,046		$	170,908		$	6,264	$	201,422

See accompanying notes to unaudited consolidated financial statements.

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S.Y. BANCORP, INC. AND SUBSIDIARY

(1) Summary of Significant Accounting Policies

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

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

A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2011 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, 2012 are not necessarily indicative of the results for the entire year.

Critical Accounting Policies

Management has identified the accounting policy related to the allowance and provision 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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(2) Securities

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

September 30, 2012	Amortized		Unrealized
Securities available for sale	cost		Gains		Losses		Fair value
(in thousands)

U.S. Treasury and other U.S. government obligations	$	60,000	$	—	$	—	$	60,000
Government sponsored enterprise obligations	103,819		2,853		—		106,672
Mortgage-backed securities	127,272		4,280		—		131,552
Obligations of states and political subdivisions	58,495		3,189		—		61,684
Trust preferred securities of financial institutions	1,000		38		—		1,038

Total securities available for sale	$	350,586	$	10,360	$	—	$	360,946

December 31, 2011	Amortized		Unrealized
Securities available for sale	cost		Gains		Losses		Fair value
(in thousands)

U.S. Treasury and other U.S. government obligations	$	115,001	$	—	$	—	$	115,001
Government sponsored enterprise obligations	43,349		2,837		—		46,186
Mortgage-backed securities	116,954		3,564		23		120,495
Obligations of states and political subdivisions	66,755		2,779		33		69,501
Trust preferred securities of financial institutions	1,000		2		—		1,002

Total securities available for sale	$	343,059	$	9,182	$	56	$	352,185

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

In addition to the available for sale portfolio, investment securities held by Bancorp include certain securities which are not readily marketable, and are carried at cost. This category includes holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock which are required 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 by a government agency security of similar duration.

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A summary of the available for sale investment securities by maturity groupings as of September 30, 2012 is shown below. Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral. Bancorp does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.

Securities available for sale	Amortized cost		Fair value
(in thousands)

Due within 1 year	$	127,449	$	127,602
Due after 1 but within 5 years	62,614		65,142
Due after 5 but within 10 years	32,251		35,612
Due after 10 years	1,000		1,038
Mortgage-backed securities	127,272		131,552
Total securities available for sale	$	350,586	$	360,946

Bancorp had no securities with unrealized losses at September 30, 2012. Securities with unrealized losses, consisting of five separate investment positions, at December 31, 2011, not recognized in income were 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

December 31, 2011
Mortgage-backed securities	$	5,122	$	23	$	—	$	—	5,122		23
Obligations of states and political subdivisions	2,644		17		1,021		16		3,665		33

Total temporarily impaired securities	$	7,766	$	40	$	1,021	$	16	$	8,787	$	56

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(3) Loans

The composition of loans by primary loan portfolio segment follows:

(in thousands)	September 30, 2012		December 31, 2011
Commercial and industrial	$	419,568	$	393,729
Construction and development	138,165		147,637
Real estate mortgage	980,179		966,665
Consumer	40,378		36,814

Total loans	$	1,578,290	$	1,544,845

The following table presents the balance in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment method as of September 30, 2012 and December 31, 2011.

	Type of loan
September 30, 2012	Commercial		Construction		Real estate
(in thousands)	and industrial		and development		mortgage		Consumer		Total

Loans
Balance	$	419,568	$	138,165	$	980,179	$	40,378	$	1,578,290

Balance: loans with an allowance recorded	$	9,730	$	12,038	$	8,187	$	4	$	29,959

Balance: loans with no related allowance recorded	$	409,838	$	126,127	$	971,992	$	40,374	$	1,548,331

	Commercial			Construction			Real estate
	and industrial			and development			mortgage			Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance December 31, 2011	$	7,364		$	3,546		$	11,182		$	540		$	7,113	$	29,745
Provision	2,658			1,476			3,551			(203		)	1,543		9,025
Charge-offs	(4,464		)	(1,334		)	(1,980		)	(589		)	—		(8,367		)
Recoveries	19			—			215			608			—		842
Ending balance September 30, 2012	$	5,577		$	3,688		$	12,968		$	356		$	8,656	$	31,245

Balance: allowance for loans with related allowance recorded	$	427		$	2,308		$	279		$	—				$	3,014

Balance: allowance for loans with no related allowance recorded	$	5,150		$	1,380		$	12,689		$	356		$	8,656	$	28,231

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	Type of loan
December 31, 2011	Commercial		Construction		Real estate
(in thousands)	and industrial		and development		mortgage		Consumer		Total

Loans
Balance	$	393,729	$	147,637	$	966,665	$	36,814	$	1,544,845

Balance: loans with an allowance recorded	$	5,459	$	2,416	$	14,170	$	94	$	22,139

Balance: loans with no related allowance recorded	$	388,270	$	145,221	$	952,495	$	36,720	$	1,522,706

	Commercial			Construction			Real estate
	and industrial			and development			mortgage			Consumer			Unallocated			Total
Allowance for loan losses
Beginning balance December 31, 2010	$	2,796		$	2,280		$	12,272		$	623		$	7,572		$	25,543
Provision	5,475			2,859			4,592			133			(459		)	12,600
Charge-offs	(1,015		)	(1,593		)	(5,840		)	(673		)	—			(9,121		)
Recoveries	108			—			158			457			—			723
Ending balance December 31, 2011	$	7,364		$	3,546		$	11,182		$	540		$	7,113		$	29,745

Balance: allowance for loans with related allowance recorded	$	954		$	10		$	1,597		$	—					$	2,561

Balance: allowance for loans with no related allowance recorded	$	6,410		$	3,536		$	9,585		$	540		$	7,113		$	27,184

Bancorp did not have any loans acquired with deteriorated credit quality at September 30, 2012 or December 31, 2011.

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

· Commercial and industrial

· Construction and development

· Real estate mortgage

· Consumer

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The following table presents loans individually evaluated for impairment as of September 30, 2012 and December 31, 2011.

			Unpaid				Average
September 30, 2012	Recorded		principal		Related		recorded
(in thousands)	investment		balance		allowance		investment

Loans with no related allowance recorded
Commercial and industrial	$	8,165	$	12,827			$	6,099
Construction and development	118		381				2,534
Real estate mortgage	6,722		9,674				4,997
Consumer	4		29				25
Subtotal	15,009		22,911				13,655

Loans with an allowance recorded
Commercial and industrial	1,565		1,565		427		3,635
Construction and development	11,920		13,745		2,308		4,784
Real estate mortgage	1,465		1,465		279		6,981
Consumer	—		—		—		—
Subtotal	14,950		16,775		3,014		15,400

Total
Commercial and industrial	$	9,730	$	14,392	$	427	$	9,734
Construction and development	12,038		14,126		2,308		7,318
Real estate mortgage	8,187		11,139		279		11,978
Consumer	4		29		—		25
Total	$	29,959	$	39,686	$	3,014	$	29,055

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			Unpaid				Average
December 31, 2011	Recorded		principal		Related		recorded
(in thousands)	investment		balance		allowance		investment

Loans with no related allowance recorded
Commercial and industrial	$	694	$	920			$	951
Construction and development	2,316		2,316				1,979
Real estate mortgage	6,453		6,453				6,353
Consumer	94		94				83
Subtotal	9,557		9,783				9,366

Loans with an allowance recorded
Commercial and industrial	4,765		6,415		954		2,447
Construction and development	100		100		10		20
Real estate mortgage	7,717		11,962		1,597		7,249
Consumer	—		—		—		10
Subtotal	12,582		18,477		2,561		9,726

Total
Commercial and industrial	$	5,459	$	7,335	$	954	$	3,398
Construction and development	2,416		2,416		10		1,999
Real estate mortgage	14,170		18,415		1,597		13,602
Consumer	94		94		—		93
Total	$	22,139	$	28,260	$	2,561	$	19,092

Differences between the recorded investment amounts and the unpaid principal balance amounts are due to partial charge-offs which have occurred over the life of the loans.

Impaired loans include non-accrual loans and loans accounted for as troubled debt restructuring (TDR), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over 90 days past due and still accruing interest. Loans past due more than 90 days or more and still accruing interest amounted to $1,228,000 at September 30, 2012, and $1,160,000 at December 31, 2011.

The following table presents the recorded investment in non-accrual loans as of September 30, 2012 and December 31, 2011.

(in thousands)	September 30, 2012		December 31, 2011

Commercial and industrial	$	2,720	$	2,665
Construction and development	12,038		2,416
Real estate mortgage	7,686		13,562
Consumer	4		94

Total	$	22,448	$	18,737

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On September 30, 2012 and 2011, Bancorp had $7.5 million and $3.9 million of loans classified as TDR, respectively. The following table presents the recorded investment in loans modified and classified as TDR during the nine months ended September 30, 2012 and 2011.

		Pre-modification		Post-modification
September 30, 2012	Number of	outstanding recorded		outstanding recorded
(dollars in thousands)	contracts	investment		investment

Commercial & industrial	3	$	5,752	$	5,752
Real estate mortgage	2	505		505
Total	5	$	6,257	$	6,257

		Pre-modification		Post-modification
September 30, 2011	Number of	outstanding recorded		outstanding recorded
(dollars in thousands)	contracts	investment		investment

Commercial & industrial	3	$	1,583	$	1,583
Real estate mortgage	2	2,099		2,099
Total	5	$	3,682	$	3,682

The following table presents the recorded investment in loans accounted for as TDR that have defaulted as of September 30, 2012.

September 30, 2012	Number of
(dollars in thousands)	Contracts	Recorded investment

Commercial & industrial	1	$	619
Real estate mortgage	1	294
Total	2	$	913

The loans in the table above are related to one borrower and management estimates minimal loss exposure to this credit after consideration of collateral. Prior to 2012, Bancorp had not experienced loans accounted for as TDR that subsequently defaulted. At September 30, 2012, loans accounted for as TDR included modifications from original terms due to bankruptcy proceedings and modifications of amortization periods due to customer financial difficulties. Some loans accounted for as TDR included temporary suspension of principal payments, resulting in payment of interest only. There has been no forgiveness of principal for loans accounted for as TDR. Loans accounted for as TDR, which have not defaulted, are individually evaluated for impairment and, at September 30, 2012, had a total allowance allocation of $298,000, compared to $1,167,000 at December 31, 2011.

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The following table presents the aging of the recorded investment in past due loans as of September 30, 2012 and December 31, 2011.

					Greater
					than
					90 days								Recorded
					past due								investment >
September 30, 2012	30-59 days		60-89 days		(includes		Total				Total		90 days and
(in thousands)	past due		past due		non-accrual)		past due		Current		loans		accruing

Commercial and industrial	$	1,735	$	608	$	2,720	$	5,063	$	414,505	$	419,568	$	—
Construction and development	413		86		12,038		12,537		125,628		138,165		—
Real estate mortgage	11,034		3,710		7,686		22,430		957,749		980,179		1,228
Consumer	13		2		1,232		1,247		39,131		40,378		—
Total	$	13,195	$	4,406	$	23,676	$	41,277	$	1,537,013	$	1,578,290	$	1,228

December 31, 2011

Commercial and industrial	$	989	$	162	$	2,665	$	3,816	$	389,913	$	393,729	$	—
Construction and development	86		—		2,416		2,502		145,135		147,637		—
Real estate mortgage	8,520		957		14,722		24,199		942,466		966,665		1,160
Consumer	336		—		94		430		36,384		36,814		—
Total	$	9,931	$	1,119	$	19,897	$	30,947	$	1,513,898	$	1,544,845	$	1,160

Bancorp categorizes loans into credit risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans included all risk-rated loans other than those classified as special mention, substandard, and doubtful, which are defined below:

· Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. These potential weaknesses may result in deterioration of repayment prospects for the loan or of the Bank’s credit position at some future date.

· Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize repayment of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

· Substandard non-performing: Loans classified as substandard-non-performing have all the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as troubled debt restructurings.

· Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

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As of September 30, 2012 and December 31, 2011, the risk categories of loans were as follows:

Credit risk profile by internally assigned grade

(in thousands)

	Commercial and industrial		Construction and development		Real estate mortgage		Consumer		Total
September 30, 2012
Grade
Pass	$	396,682	$	119,296	$	917,279	$	40,374	$	1,473,631
Special mention	11,097		6,831		26,770		—		44,698
Substandard	3,317		—		26,711		—		30,028
Substandard non-performing	8,472		12,038		9,419		4		29,933
Doubtful	—		—		—		—		—
Total	$	419,568	$	138,165	$	980,179	$	40,378	$	1,578,290

December 31, 2011

Grade
Pass	$	356,090	$	132,846	$	896,217