SYBT 10-K Fiscal year ended Dec. 31, 2010

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

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

S.Y. BANCORP, INC.

1040 East Main Street
Louisville, Kentucky 40206
(502) 582-2571

Incorporated in Kentucky

I.R.S. No. 61-1137529

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:		Name of each exchange on which registered:
Common Stock, no par value		NASDAQ
Preferred Share Purchase Rights		NASDAQ
10.00% Cumulative Trust Preferred Securities and the guarantee with respect thereto		NASDAQ

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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:

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 aggregate market value of registrant’s voting stock (Common Stock, no par value) held by non-affiliates of the registrant as of June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was $277,106,000.

The number of shares of the registrant’s Common Stock, no par value, outstanding as of February 22, 2011, was 13,744,729.

Documents Incorporated By Reference

Portions of Registrant’s definitive proxy statement related to Registrant’s Annual Meeting of Shareholders to be held on April 27, 2011 (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Form 10-K.

Table of Contents

S.Y. BANCORP, INC.
Form 10-K
Index

Part I:
Item 1.	Business	3
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	8
Item 2.	Properties	8
Item 3.	Legal Proceedings	8
Item 4.	[Reserved]	8
Part II:
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	10
Item 6.	Selected Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	85
Item 9A.	Controls and Procedures	85
Item 9B.	Other Information	88
Part III:
Item 10.	Directors, Executive Officers and Corporate Governance	88
Item 11.	Executive Compensation	88
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89
Item 13.	Certain Relationships and Related Transactions, and Director Independence	89
Item 14.	Principal Accountant Fees and Services	89
Part IV:
Item 15.	Exhibits and Financial Statement Schedules	89
Signatures		92
Index to Exhibits		93

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Part I

Item 1. Business

S. Y. Bancorp, Inc. (“Bancorp” or “Company”) was incorporated in 1988 and is a Kentucky corporation headquartered in Louisville, Kentucky. Bancorp is a bank holding company registered with, and subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System. Bancorp has two subsidiaries, Stock Yards Bank & Trust Company (the Bank) and S.Y. Bancorp Capital Trust II (the Trust). The Bank is wholly owned and is a state chartered bank. Because Bancorp has no operations of its own, its business and that of the Bank are essentially the same.  The operations of the Bank are fully reflected in the consolidated financial statements of Bancorp.  Accordingly, references to “Bancorp” in this document may encompass both the holding company and the Bank.  The Trust is a Delaware statutory trust that is a 100%-owned finance subsidiary of Bancorp.  See Note 11 to Bancorp’s consolidated financial statements for further discussion of the Trust and its accounting treatment.

Stock Yards Bank & Trust Company

Stock Yards Bank & Trust Company is the banking subsidiary of Bancorp and was chartered in 1904.  The Bank is headquartered in Louisville, Kentucky and provides commercial and personal banking services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets through 30 full service banking offices (See “ITEM 2. PROPERTIES”).  The Bank is chartered under the laws of the Commonwealth of Kentucky.  In addition to traditional commercial and personal banking activities, the Bank has an investment management and trust department offering a wide range of trust administration, investment management, retirement planning, estate administration and financial planning services.  This department operates under the name of Stock Yards Trust Company.  The Bank also originates and sells single-family residential mortgages through Stock Yards Mortgage Company. Additionally, the Bank offers securities brokerage services in the name of Stock Yards Financial Services through an arrangement with a third party broker-dealer.  See Note 23 to Bancorp’s consolidated financial statements for the year ended December 31, 2010 for information relating to the Bank’s business segments.

At December 31, 2010, the Bank had 475 full-time equivalent employees.  Management of Bancorp strives to be an employer of choice and considers the relationship with employees to be good.

Supervision and Regulation

Bank holding companies and commercial banks are extensively regulated under both federal and state laws. Any change in applicable laws or regulations may have a material effect on the business and prospects of Bancorp and the Bank.

Bancorp, as a registered bank holding company, is subject to the supervision of and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In addition, Bancorp is subject to the provisions of Kentucky’s banking laws regulating bank acquisitions and certain activities of controlling bank shareholders.

Kentucky and federal banking statutes delineate permissible activities for Kentucky state-chartered banks.  Kentucky’s statutes, however, contain a super parity provision for Kentucky banks having a top one or two rating in its most recent regulatory examination.  This provision allows a state bank to engage in any banking activity in which a national bank in Kentucky, a state bank operating in any other state, or a federally chartered thrift could engage.  The bank must first obtain a legal opinion specifying the statutory or regulatory provisions that permit the activity.

The Bank is subject to the supervision of the Federal Deposit Insurance Corporation and the Kentucky Department of Financial Institutions. The Federal Deposit Insurance Corporation (FDIC) insures the deposits of the Bank to the current maximums of $250,000 per depositor for time and demand deposit accounts and self-directed retirement accounts.  In addition, the FDIC insures all balances in non-interest bearing demand deposit accounts of the Bank through December 31, 2012 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010.

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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the 1994 Act) removed state law barriers to interstate bank acquisitions and permits the consolidation of interstate banking operations. Under the 1994 Act, adequately capitalized and managed bank holding companies may acquire banks in any state, subject to Community Reinvestment Act compliance, compliance with federal and state antitrust laws and deposit concentration limits and subject to any state laws restricting the transaction. Kentucky banks are also permitted to acquire a branch in another state if permitted by law of the other state.  Kentucky currently allows out-of-state banks to enter Kentucky to provide banking services on the same terms that a Kentucky bank could enter that bank’s state.

The Gramm-Leach-Bliley Act (the GLB Act) allows for affiliations among banks, securities firms and insurance companies by means of a financial holding company (FHC). In most cases, the creation of an FHC is a simple election and notice to the Federal Reserve Board. The GLB Act requires that, at the time of establishment of an FHC, all depository institutions within that corporate group must be “well managed” and “well capitalized” and must have received a rating of “satisfactory” or better under its most recent Community Reinvestment Act examination. Further, non-banking financial firms (for example an insurance company or securities firm) may establish an FHC and acquire a depository institution. While the distinction between banks and non-banking financial firms has been blurring over recent years, the GLB Act makes it less cumbersome for banks to offer services “financial in nature” but beyond traditional commercial banking activities. Likewise, non-banking financial firms may find it easier to offer services that had, heretofore, been provided primarily by depository institutions.  Management of Bancorp has chosen not to become an FHC at this time, but may choose to do so in the future.

In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (The “USA Patriot Act”) was signed into law. The USA Patriot Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as Bancorp’s broker-dealer subsidiary. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.

On October 3, 2008, in response to the stresses experienced in the financial markets, the Emergency Economic Stabilization Act (EESA) was enacted. Pursuant to its authority under EESA, Treasury created the TARP Capital Purchase Program (CPP) under which the Treasury Department would invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Although it was approved for participation, Bancorp declined to participate in federal TARP funding because its capital levels were and remain significantly in excess of what is required to be considered “well-capitalized” under regulatory standards.

In May 2009, as part of its efforts to rebuild the Deposit Insurance Fund DIF, the FDIC levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June 30, 2009.  In lieu of further special assessments, in November 2009, the FDIC required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was signed into law in July 2010.  Generally, the Act was effective the day after it was signed into law, but different effective dates apply to specific sections of the law.  This new extensive and complex legislation contains many new provisions affecting the banking industry, including:

· Creation of a new Bureau of Consumer Financial Protection

· Determination of debit card interchange rates by the Federal Reserve Board

· New regulation over derivative instruments

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· Establishment of new powers enabling federal regulators to seize and dismantle troubled financial firms

· Phase outs of certain forms of trust preferred debt and hybrids previously included as bank capital

· Increases to FDIC deposit coverage, increased bank premiums, and numerous other provisions affecting financial institution regulation, oversight of certain non-banking organizations, investor protection, etc.

Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have an adverse impact on the financial services industry as a whole and on Bancorp’s business, results of operations and financial condition.

In February 2011, per the Dodd-Frank Act, the FDIC redefined the deposit assessment base as average consolidated total assets minus average tangible equity, and adopted a new assessment rate schedule effective April 1, 2011.  Management expects the new assessment base will decrease the Company’s FDIC insurance expense somewhat beginning in 2011, based on the assessment rates established in the final rule.

Available Information

Bancorp files reports with the SEC including the Annual Report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials the Registrant files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.  Bancorp’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are accessible at no cost on Bancorp’s web site at http://www.syb.com after they are electronically filed with or furnished to the SEC.

Item 1A. Risk Factors

Investments in Bancorp’s common stock or trust preferred securities involve risk, and Bancorp’s profitability and success may be affected by a number of factors including those discussed below.

Our financial condition and profitability depend significantly on local and national economic conditions.

Our success depends on general economic conditions both locally and nationally.  Most of our customers are in the Louisville metropolitan area with a growing number of customers in the Indianapolis and Cincinnati markets.  Some of our customers are directly impacted by the local economy while others have more national or global business dealings. Some of the factors influencing general economic conditions include recession, unemployment, and inflation. Economic conditions have an impact on the demand of our customers for loans, the ability of some borrowers to repay these loans, availability of deposits and the value of the collateral securing these loans.

We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Over half of our loans are secured by real estate (both residential and commercial) in our market area. Adverse changes in the local or national economy could negatively affect our customer’s ability to pay these loans. If borrowers are unable to repay their loans from us and there has been deterioration in the value of the loan collateral, we could experience higher loan losses. Additional increases in loan loss provisions may be necessary in the future. Deterioration in the quality of our credit portfolio could have a material adverse effect on our financial condition, results of operations, and ultimately our capital.

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Declines in the housing market over the past few years, falling home prices, increasing foreclosures, unemployment and under employment have negatively impacted the credit performance of real estate related loans and resulted in significant write downs of asset values by many financial institutions. These write downs have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. This market turmoil has led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. To date, the impact of these adverse conditions has not been severe in the primary markets we serve. Should market conditions worsen and foreclosed assets increase significantly, Bancorp’s flexibility to approach collateral sales in an orderly fashion to minimize losses may be reduced and management may be forced to liquidate problem loans more rapidly, thus increasing the loss on these assets. If current levels of market disruption and volatility continue or potentially worsen, there can be no assurance that we will not experience an adverse effect, which may be material, to our financial condition and results of operations.

Significant stock market volatility could negatively affect our financial results.

Capital and credit markets experience volatility and disruption from time to time.  These conditions place downward pressure on credit availability, credit worthiness and our customers’ inclinations to borrow.  Prolonged volatility or a significant disruption could negatively impact our customers’ ability to seek new loans or to repay existing loans.  The personal wealth of many of our borrowers and guarantors has historically added a source of financial strength to certain loans and could be negatively impacted by severe market declines.  Sustained reliance on their personal assets to make loan payments would result in deterioration of their liquidity, and could result in loan defaults.

Trust assets under management are expressed in terms of market value, and a significant portion of fee income is based upon those values.  Fees earned are directly affected by the performance of the equity and bond markets.  Declines in asset values result in a decrease in income from investment management and trust services.

If our actual loan losses are greater than our allowance assumption for loan losses, our earnings could decrease.

Our loan customers may not repay their loans according to the terms of these loans, the collateral securing the payment of these loans may be insufficient to ensure repayment and the wealth of guarantors providing guarantees to support these loans may be insufficient to aid in the repayment of these loans.  Accordingly, we may experience significant credit losses which could have a material adverse effect on operating results.  We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of real estate and other assets serving as collateral for repayment of many of our loans.  In determining the adequacy of the allowance for loan losses, we consider, among other factors, our loan loss experience and an evaluation of economic conditions.  There has been continued economic softness, particularly slumping housing and commercial real estate market conditions.  If our assumptions prove to be incorrect or economic problems are worse than projected, our current allowance may not be sufficient to cover loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio.  Such additions to our allowance, if necessary, could have a material adverse impact on our financial results.

In addition, federal and state regulators periodically review our allowance for loan losses and may require an increase in our provision for loan losses or loan charge-offs. If the regulatory agencies require any increase in our provision for loan losses or loan charge-offs for which we had not allocated, it would have a negative effect on net income.

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Fluctuations in interest rates could reduce our profitability.

Our primary source of income is from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings.  We expect to periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa.  In either event, if market interest rates should move contrary to our position, this “gap” will work against us and our earnings may be negatively affected.

Many factors affect the fluctuation of market interest rates, including, but not limited to the following:

· Inflation or deflation;

· recession;

· a rise in unemployment;

· tightening money supply;

· international disorder and instability in foreign financial markets;

· the Federal Reserve reducing rates; and

· competition from other financial institutions.

Prevailing interest rates are at historically low levels, and indications are that the Federal Reserve will likely maintain the low rates for much of the upcoming year.  An increase in interest rates of up to 2% will decrease our net interest income, primarily because the majority of our variable rate loans have floors of 4% or higher.  Deposit rates generally do not reprice as quickly as loans.  Once rates begin to rise, our net interest margin likely will be negatively affected until the increase exceeds 75 basis points from today’s levels. Our asset-liability management strategy, which is designed to mitigate our risk from changes in market interest rates, may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.  Our most recent earnings simulation model estimating the impact of changing interest rates on earnings indicates net interest income will increase by approximately 0.9% if interest rates immediately decrease 100 basis points for the next 12 months and decrease approximately 0.3% if rates increase 200 basis points.  Additionally, we have observed that competitor banks may be willing to pay rates on deposits well in excess of normal market rates, depending on their liquidity needs.

Competition with other financial institutions could adversely affect our profitability.

We operate in a highly competitive industry that could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. We face vigorous competition from banks and other financial institutions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services. Additionally, we encounter competition from smaller community banks in our markets.  We also compete with other non-traditional providers of financial services, such as brokerage firms, insurance companies and credit unions. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our results of operations and financial condition.

Our accounting policies and methods are critical to how we report our financial condition and results of operations. They require management to make estimates about matters that are uncertain.

Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. We must exercise judgment in selecting and applying these accounting policies and methods so they comply with Generally Accepted Accounting Principles in the United States (US GAAP).

We have identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, or reducing a liability. We have established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies

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occurs in an appropriate manner. Because of the uncertainty surrounding our judgments and the estimates pertaining to these matters, there can be no assurances that actual results will not differ from those estimates. See the “Critical Accounting Policies” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

An extended disruption of vital infrastructure or a security breach could negatively impact our business, results of operations, and financial condition.

Our operations depend upon, among other things, our infrastructure, including equipment and facilities.  Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, information systems breaches, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry as a whole and on our business, results of operations and financial condition.  Our business recovery plan may not work as intended or may not prevent significant interruption of our operations.  The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in the loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have an adverse effect on our financial condition and results of operation.

We operate in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations.

We are subject to extensive regulation, supervision and examination by federal and state banking authorities.  Any change in applicable regulations or federal or state legislation could have a substantial impact on our bank and its operations.  Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority and operations, which could have a material adverse effect on our financial condition and results of operations.  Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties.  The exercise of regulatory power may have negative impact on our results of operations and financial condition.

Item 1B. Unresolved Staff Comments

Bancorp has no unresolved SEC staff comments.

Item 2.        Properties

The principal offices of Bancorp and the Bank are located at 1040 East Main Street, Louisville, Kentucky. The Bank’s operations center is a part of the main office complex. In addition to the main office complex, the Bank owned fourteen branch properties at December 31, 2010, two of which are located on leased land.  At that date, the Bank also leased fifteen branch facilities.  Of the thirty banking locations, twenty-five are located in the Louisville MSA, two are located in Indianapolis MSA and three are located in the Cincinnati MSA. See Notes 5 and 17 to Bancorp’s consolidated financial statements for the year ended December 31, 2010, for additional information relating to amounts invested in premises, equipment and lease commitments .

Item 3.        Legal Proceedings

See Note 17 to Bancorp’s consolidated financial statements for the year ended December 31, 2010, for information relating to legal proceedings.

Item 4. [Reserved]

None

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Executive Officers of the Registrant

The following table lists the names and ages as of December 31, 2010 of all current executive officers of Bancorp and the Bank. Each executive officer is appointed by Bancorp’s Board of Directors to serve at the discretion of the Board. There is no arrangement or understanding between any executive officer of Bancorp or the Bank and any other person(s) pursuant to which he/she was or is to be selected as an officer.

Name and Age of Executive Officer		Position and Offices with Bancorp and/or the Bank
David P. Heintzman Age 51		Chairman of the Board of Directors and Chief Executive Officer of Bancorp and the Bank
James A. Hillebrand Age 42		President and Director of Bancorp and the Bank
Kathy C. Thompson Age 49		Senior Executive Vice President and Director of Bancorp and the Bank
Nancy B. Davis Age 55		Executive Vice President, Secretary, Treasurer and Chief Financial Officer of Bancorp and the Bank
William M. Dishman III Age 47		Executive Vice President and Chief Risk Officer of the Bank
Gregory A. Hoeck Age 60		Executive Vice President of the Bank
Philip S. Poindexter Age 44		Executive Vice President and Chief Lending Officer of the Bank
T. Clay Stinnett Age 37		Executive Vice President and Chief Strategic Officer of Bancorp and the Bank

Mr. Heintzman was appointed Chairman and Chief Executive Officer effective in January 2006.  Prior thereto, he served as President of Bancorp and the Bank since 1992. Mr. Heintzman joined the Bank in 1985.

Mr. Hillebrand was appointed President effective in July 2008.  Prior thereto, he served as Executive Vice President and Director of Private Banking of the Bank since 2005. From 2000 to 2004, he served as Senior Vice President of Private Banking.  Mr. Hillebrand joined the Bank in 1996.

Ms. Thompson was appointed Senior Executive Vice President in January 2006.   Prior thereto, she served as Executive Vice President of Bancorp and the Bank. She joined the Bank in 1992 and is Manager of the Investment Management and Trust Department.

Ms. Davis was appointed Executive Vice President of Bancorp and the Bank in 1999 and Chief Financial Officer in 1993.  She joined the Bank in 1991.

Mr. Dishman joined the Bank and was appointed Executive Vice President and Chief Risk Officer in February 2009.  Prior thereto, he served as Executive Vice President and Chief Credit Officer for National City Bank’s Kentucky and Tennessee markets from 2004 to 2009.

Mr. Hoeck joined the Bank and was appointed Executive Vice President in May 1998.  He is the manager of Retail Banking for the Bank.

Mr. Poindexter was appointed Chief Lending Officer in July 2008.  Prior thereto, he served as Executive Vice President and Director of Commercial Lending.  Mr. Poindexter joined the Bank in 2004.

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Mr. Stinnett was appointed Executive Vice President and Chief Strategic Officer in February 2011.  Prior thereto, he served as Senior Vice President and Chief Strategic Officer since 2005.  Mr. Stinnett joined the Bank in 2000.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Bancorp’s common stock is traded on the NASDAQ Global Select Market under the ticker symbol SYBT.  Prior to July 2006, the stock traded on the American Stock Exchange under the symbol SYI.  The table below sets forth the quarterly high and low market closing prices of Bancorp’s common stock and dividends declared per share. The payment of dividends by the Bank to Bancorp is subject to the restriction described in Note 16 to the consolidated financial statements. Management believes that Bancorp will continue to generate adequate earnings to continue and pay dividends on a quarterly basis.  On December 31, 2010, Bancorp had approximately 1,321 shareholders of record, and approximately 3,300 non-objecting beneficial owners holding shares in nominee or “street” name.

		2010									2009
								Cash dividends									Cash dividends
Quarter		High			Low			declared			High			Low			declared
First		$	23.34		$	20.00		$	0.17		$	27.50		$	18.65		$	0.17
Second		24.98			22.88			0.17			27.39			23.65			0.17
Third		25.44			22.99			0.17			25.07			21.56			0.17
Fourth		25.20			23.86			0.18			23.88			21.17			0.17

The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended December 31, 2010.

		Total Number of Shares Purchased (1)		Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Plan (2)		Maximum Number of Shares that May Yet Be Purchased Under the Plan
October 1-October 31		—		$	—		—		—
November 1-November 30		409		25.20			—		—
December 1-December 31		4,192		25.09			—		—
Total		4,601		$	25.10		—		—

(1) Fourth quarter 2010 activity represents shares surrendered by officers, the fair value of which equaled the exercise price of stock options.  This activity has no impact on the number of shares that may be purchased under a Board-approved plan.

(2) The Board of Directors of S.Y. Bancorp Inc. first approved a share buyback plan in 1999, and in 2005 and 2007 expanded the plan to allow for the repurchase of additional shares.  The stock repurchase program expired in November 2008, and has not been renewed.

The following performance graph and data shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed soliciting material or subject to Regulation 14A of the Exchange Act or incorporated by reference in any filing under the Exchange Act or the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

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The graph compares the performance of Bancorp Common Stock to the Russell 2000 index, the SNL NASDAQ Bank index and the SNL Midwest Bank index for Bancorp’s last five fiscal years. The graph assumes the value of the investment in Bancorp Common Stock and in each index was $100 at December 31, 2005 and that all dividends were reinvested.

		Period Ending
Index		12/31/05		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
S.Y. Bancorp, Inc.		100.00		120.06		105.31		124.32		99.47		117.73
Russell 2000 Index		100.00		118.37		116.51		77.15		98.11		124.46
SNL Midwest Bank Index		100.00		115.59		90.09		59.27		50.23		62.38
SNL NASDAQ Bank Index		100.00		112.27		88.14		64.01		51.93		61.27

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Item 6. Selected Financial Data

Selected Consolidated Financial Data

		Years ended December 31
(Dollars in thousands except per share data)		2010			2009			2008			2007			2006
Net interest income		$	66,879		$	58,675		$	56,858		$	53,691		$	53,875
Provision for loan losses		11,469			12,775			4,050			3,525			2,100
Net income		22,953			16,308			21,676			24,052			22,896
Per share data
Net income, basic		$	1.68		$	1.20		$	1.61		$	1.70		$	1.58
Net income, diluted		1.67			1.19			1.59			1.67			1.55
Cash dividends declared		0.69			0.68			0.68			0.63			0.57
Book value		12.37			11.29			10.72			9.78			9.54
Market value		24.55			21.35			27.50			23.94			28.00
Average balances
Stockholders’ equity		$	163,572		$	150,721		$	136,112		$	139,357		$	131,971
Assets		1,847,452			1,717,474			1,567,967			1,413,614			1,353,651
Federal Home Loan Bank advances		69,159			80,904			86,011			65,699			34,466
Long-term debt		40,901			40,930			3,361			93			10,458
Selected ratios
Return on average assets		1.24		%	0.95		%	1.38		%	1.70		%	1.69		%
Return on average stockholders’ equity		14.03			10.82			15.93			17.26			17.35
Average stockholders’ equity to average assets		8.85			8.78			8.68			9.86			9.75
Net interest rate spread		3.66			3.35			3.51			3.48			3.77
Net interest rate margin, fully tax-equivalent		3.93			3.68			3.93			4.16			4.37
Efficiency ratio		56.01			58.70			57.27			54.68			55.76
Non-performing loans to total loans		1.28			0.84			0.35			0.28			0.59
Non-performing assets to total assets		1.30			0.77			0.39			0.49			0.65
Net charge offs to average loans		0.40			0.59			0.16			0.20			0.18
Allowance for loan losses to total loans		1.69			1.39			1.14			1.12			1.06

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Item 7.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Section Roadmap

The financial section of our Form 10-K includes management’s discussion and analysis, our consolidated financial statements, and the notes to those financial statements. We have prepared the following summary, or “roadmap,” to assist in your review of the financial section. It is designed to give you an overview of S.Y. Bancorp, Inc. and summarize some of the more important activities and events that occurred during 2010.

Our Business

S.Y. Bancorp, Inc. (Bancorp), incorporated in 1988, has no active business operations. Thus, Bancorp’s business is substantially the same as that of its wholly owned subsidiary, Stock Yards Bank & Trust Company (the Bank).  The Bank has operated continuously since it opened in 1904. The Bank conducted business at one location for 85 years and began branching in 1989. At December 31, 2010, the Bank had 25 full service banking locations in the Louisville MSA, two full service banking locations in Indianapolis, and three full service banking locations in Cincinnati. The Bank’s focus on flexible, attentive customer service has been key to its growth and profitability. The wide range of services added by the investment management and trust department, the brokerage department, and the mortgage department helps support the corporate philosophy of capitalizing on full service customer relationships.

Financial Section Overview

The financial section includes the following:

Management’s discussion and analysis, or MD&A (pages 13 through 42) — provides information as to the analysis of the consolidated financial condition and results of operations of Bancorp.  It contains our management’s view about industry trends, risks, uncertainties, accounting policies that we view as critical in light of our business, our results of operations including discussion of the key performance drivers of each of our business segments, our financial position, cash flows, commitments and contingencies, important events, transactions that have occurred over the last three years, and forward-looking information, as appropriate.

Financial statements (pages 43 through 47) — include our Consolidated Balance Sheets as of the end of the last two years, and Consolidated Statements of Income, Changes in Stockholders’ Equity, Comprehensive Income, and Cash Flows for each of the last three years. Our financial statements are prepared in accordance with US GAAP.

Notes to the financial statements (pages 48 through 82) — provide insight into, and are an integral part of, our financial statements. The notes contain explanations of our significant accounting policies, details about certain captions on the financial statements, information about significant events or transactions that have occurred, discussions about legal proceedings, commitments and contingencies, and selected financial information relating to our business segments. The notes to the financial statements also are prepared in accordance with US GAAP.

Reports related to the financial statements and internal control over financial reporting (pages 83 through 87) — include the following:

· A report from KPMG LLP, an independent registered public accounting firm, which includes their opinion on the fair presentation of our consolidated financial statements based on their audits,

· A report from management indicating our responsibility for financial reporting and the financial statements,

· A report from management indicating our responsibility for the system of internal control over financial reporting,  including an assessment of the effectiveness of those controls; and

· A report from KPMG LLP, an independent registered public accounting firm, which includes their opinion on the effectiveness of the Company’s internal control over financial reporting.

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Forward-Looking Statements

This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. These forward-looking statements may be identified by the use of words such as “expect”, “anticipate”, “plan”, “foresee” or other words with similar meaning.  Although Bancorp believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions both generally and more specifically in the markets in which Bancorp and its subsidiaries operate; competition for the Bank’s customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, deterioration in the real estate market, results of operations or financial condition of the Bank’s customers; or other risks detailed in Bancorp’s filings with the Securities and Exchange Commission and Item 1A of this Form 10-K all of which are difficult to predict and many of which are beyond the control of Bancorp.

Critical Accounting Policies

Bancorp has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America.  In preparing the consolidated financial statements in accordance with US GAAP, Bancorp makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  There can be no assurances that actual results will not differ from those estimates.

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.   The impact and any associated risks related to this policy on Bancorp’s business operations are discussed in the “Allowance for Loan Losses” section below.

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 IRS examinations and examinations by other state agencies, could materially impact Bancorp’s financial position and its results from operations.  Additional information regarding income taxes is discussed in the “Income Taxes” section below.

Overview of 2010

The following discussion should be read in conjunction with Bancorp’s consolidated financial statements and accompanying notes and other schedules presented elsewhere in this report.

In 2010, Bancorp completed a solid year of asset and deposit growth with net income totaling $22,953,000, an increase of 41% over 2009.  Increased profitability was primarily due to loan growth, an improvement in net interest margin and increasing non-interest income. Diluted earnings per share for 2010 increased 40% over 2009 to $1.67, matching the amount recorded for 2007 prior to the recession’s onset.

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As is the case with most banks, the primary source of Bancorp’s revenue is net interest income and fees from various financial services provided to customers.  Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities.  Loan volume and the interest rates earned on those loans are critical to overall profitability. Similarly deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability.  Business volumes are influenced by overall economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.

Bancorp’s loan portfolio increased 5% during 2010 to $1.5 billion and this was the driving force for growth in interest income. Increased loan volume contributed to higher interest income in 2010, partially offset by declining interest rates on loans and investments over the past year.  Despite deposit growth to support loan growth, interest expense declined due to lower funding costs on deposits and borrowings.  Rates paid on liabilities decreased more than rates decreased on earning assets, resulting in an increased net interest spread and net interest margin compared to 2009.

Distinguishing Bancorp from other similarly sized community banks is the magnitude of its investment management and trust revenue, making total non-interest income a continuing key contributor to earnings in 2010.  Total non-interest income increased 12% in 2010 compared to 2009, largely due to increased income from investment management and trust services.  Income from investment management and trust services increased 19% for 2010 due to higher asset values, a modest increase in non-recurring estate fees and an expanding client base.  Trust assets under management rose to $1.70 billion at December 31, 2010, compared to $1.55 billion at December 31, 2009.   Revenue is earned as a percentage of the market value of the assets under management and therefore is tied directly to the broader market’s overall performance.  In addition, Bancorp experienced increases in service charges on deposit accounts, bankcard transaction income, gains on sales of mortgage loans, gains on sales of securities available for sale, and brokerage income.

Higher non-interest expenses for 2010 were reflected in salaries and benefits, occupancy expenses and data processing expenses, partially offset by a decrease in FDIC insurance expense. Bancorp’s efficiency ratio for 2010 of 56.01% compared favorably with 58.70% in 2009.

Also impacting 2010 results, Bancorp’s provision for loan losses decreased to $11,469,000 compared to $12,775,000 for 2009, primarily due to a $4.1 million loan loss provision in 2009 related to a fraudulent loan.  Excluding the fraudulent loan, the provision increased in response to Bancorp’s assessment of inherent risk in the loan portfolio.  The provision for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysis of the risk in the loan portfolio. The provision reflects an allowance methodology that is driven by risk ratings, and reflected the impact of downgrading various loans’ status due to the ongoing economic stress on borrowers witnessed from 2008 through 2010.  Ultimately, this required a higher provision.  Management continues to be concerned that the prolonged economic downturn and prospects for a slow recovery will continue to take a toll on Bancorp’s loan portfolio and underlying collateral values, extending its impact to lending relationships that have to date not been identified.  Bancorp’s allowance for loan losses was 1.69% of total loans at December 31, 2010, compared with 1.39% of total loans at December 31, 2009.

Bancorp’s effective tax rate decreased to 28.3% in 2010 from 29.8% in 2009.  The decrease in the 2010 effective tax rate was primarily due to new market and historic tax credits arising from Bancorp’s investment in a Louisville revitalization project in the second quarter of 2010.

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Tangible common equity (TCE), a non-GAAP measure, is a measure of a company’s capital which is useful in evaluating the quality and adequacy of capital.  It is calculated by subtracting the value of intangible assets and any preferred equity from the book value of Bancorp.  A summary of our TCE ratios at December 31, 2010 and 2009 is shown in the following table.

(in thousands, except per share data)		December 31, 2010			December 31, 2009
Total equity		$	169,861		$	153,614
Less goodwill		(682		)	(682		)
Tangible common equity		169,179			152,932
Total assets		1,902,945			1,791,479
Less goodwill		(682		)	(682		)
Total tangible assets		1,902,263			1,790,797
Tangible common equity ratio		8.89		%	8.54		%
Number of outstanding shares		13,737			13,607
Tangible common equity per share		$	12.32		$	11.24

See “Non-GAAP Financial Measures” for reconcilement of TCE to US GAAP measures.

Challenges for 2011 will include managing credit quality and achieving continued loan growth.

· A continued economic downturn could cause us to have a higher level of non-performing loans and potentially lower loan demand, both of which would negatively impact net income.

· Even as the economy begins to show some signs of general improvement, these emerging indications are not even or broad-based, and the extended duration of the economic downturn continues to weaken already stressed borrowers.  These conditions will likely have an ongoing effect on certain borrowers until overall business and real estate conditions improve.  Moreover, should market conditions worsen and foreclosed assets increase significantly, Bancorp’s flexibility to approach collateral sales in an orderly fashion to minimize losses may be reduced and management may be forced to liquidate problem loans more rapidly, thus increasing the loss on these assets.

· To achieve our profitability goals for 2011, net loan growth must continue at a pace in excess of 2010. This will be impacted by competition and prevailing economic conditions.  We believe there is significant opportunity for growth, and our ability to deliver attractive growth over the long-term is linked to our success in each market.

· The Federal Reserve Board lowered its key short term rate in 2008 to unprecedentedly low levels, and rates have remained low throughout 2009, 2010 and into 2011.  Indications are that the Federal Reserve will keep short term rates low throughout 2011.  Approximately 40% of the Bank’s loans are indexed to the prime interest rate and reprice immediately with Federal Reserve rate changes. However, approximately 73% of variable rate loans have reached their contractual floor of 4% or higher, meaning they will not reprice immediately when the prime rate increases.  Deposit rates generally do not reprice as quickly as loans.  Once rates begin to rise, our net interest margin likely will be negatively affected until the increase exceeds 75 basis points from today’s levels.

· We expect net interest margin to be fairly consistent in 2011 with the level achieved in the fourth quarter of 2010 as rates are expected to be largely unchanged through the fourth quarter of 2011.  This would result in a net interest margin for 2011 similar to the level seen in 2010.  Increased deposit and loan rate competition could negatively impact this expectation.

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· We expect a decrease in non-interest income for 2011 relating to gains on sales of mortgage loans held for sale, as we do not expect the volume of refinance activity to continue at the record pace we experienced in 2009 and 2010.  We also expect a decrease in service charges on deposits and bankcard transaction income primarily due to recent, as well as proposed, regulatory changes.  We expect year-over-year increases in non-interest expense including personnel and occupancy expenses as we opened two new locations in 2010.

The following sections provide more details on subjects presented in this overview.

Results of Operations

Net income was $22,953,000 or $1.67 per share on a diluted basis for 2010 compared to $16,308,000 or $1.19 per share for 2009 and $21,676,000 or $1.59 per share for 2008.  Net income for 2010 was positively impacted by:

· A 14% or $8.2 million increase in net interest income.

· A 12% or $3.7 million, increase in non-interest income.

· A 10% or $1.3 million decrease in provision for loan losses.

· A 1.5% or $476 thousand decrease in the effective tax rate

Net income for 2010 was negatively impacted by an 8% or $4.4 million increase in non-interest expenses.

The following paragraphs provide a more detailed analysis of the significant factors affecting operating results.

Net Interest Income

Net interest income, the most significant component of Bancorp’s earnings, represents total interest income less total interest expense.  Net interest spread is the difference between the taxable equivalent rate earned on average interest earning assets and the rate expensed on average interest bearing liabilities.  Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average earning assets.  Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds.  The level of net interest income is determined by the mix and volume of interest earning assets, interest bearing deposits and interest bearing liabilities and by changes in interest rates. The discussion that follows is based on tax-equivalent interest data.

Comparative information regarding net interest income follows:

(Dollars in thousands)		2010			2009			2008			2010/2009 Change		2009/2008 Change
Net interest income, tax-equivalent basis		$	68,264		$	59,729		$	57,872		14.3	%	3.2	%
Net interest spread		3.66		%	3.35		%	3.51		%	31	bp	(16	)bp
Net interest margin		3.93		%	3.68		%	3.93		%	25	bp	(25	)bp
Average earning assets		$	1,738,718		$	1,621,757		$	1,472,098		7.2	%	10.2	%
Five year Treasury bond rate at year end		2.02		%	2.69		%	1.55		%	(67	)bp	114	bp
Average five year Treasury bond rate		1.91		%	2.19		%	2.79		%	(28	)bp	(60	)bp
Prime rate at year end		3.25		%	3.25		%	3.25		%	0	bp	0	bp
Average prime rate		3.25		%	3.25		%	5.09		%	0	bp	(184	)bp

bp = basis point = 1/100th of a percent

Prime rate and the five year Treasury bond rate are included above to provide a general indication of the interest rate environment in which the Bank operated.  Approximately 40% of the Bank’s loans are variable rate and most of these loans are indexed to the prime rate and may reprice as that rate changes.  However,

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approximately $460 million, or 73% of variable rate loans, have reached their contractual floor of 4% or higher.  Approximately $115 million or 18% of variable rate loans have no contractual floor. The Bank intends to establish floors whenever possible upon renewal of the loans.  The remaining $59 million of variable rate loans, or 9% of variable rate loans, have contractual floors below 4%.  The Bank’s variable rate loans are primarily comprised of commercial lines of credit and real estate loans.  At inception, most of the Bank’s fixed rate loans are priced in relation to the five year Treasury bond and the persistence of low short term rates has held those rates low.

Average loan balances increased $77 million or 5.6% in 2010; however, the declining interest rate environment drove average loan yields lower by 12 basis points.  Bancorp grew average interest bearing deposits $85 million or 7.6% to fund loan growth.  Average interest costs on interest bearing deposits decreased 51 basis points, again reflecting the declining interest rate market and a more favorable mix of deposits. Average FHLB advances decreased by $11.7 million or 14.5%, with average rates decreasing by 85 basis points.  The average rate on long-term debt decreased 12 basis points.  Rate changes, combined with volume increases on loans and deposits, resulted in an increase in net interest income and net interest margin for 2010 compared to 2009.

Management anticipates a stable prime rate for 2011. Bancorp believes the net interest margin has stabilized.  Time deposit maturities of approximately $136 million, or 32% of total time deposits, in the first two quarters could spark slight improvement in interest expense.  However, this will be offset by declining overall rates in the loan portfolio as persistent low prevailing rates are expected to erode the overall yield on loans and investments.  This expectation is based on current loan and deposit pricing in the markets in which Bancorp operates.  The margin could be impacted negatively if competition causes increases in deposit rates or a decline in loan pricing in those markets.

Asset/Liability Management and Interest Rate Risk

Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity while attempting to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.

Interest Rate Simulation Sensitivity Analysis

Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one year forecast. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time.  The model is therefore a tool to indicate earnings trends in given interest rate scenarios and does not indicate actual expected results.  The December 31, 2010 simulation analysis, which shows very little interest rate sensitivity, indicates that an increase in interest rates of 100 to 200 basis points would have a slightly negative effect on net interest income, and a decrease of 100 basis points in interest rates would have a slightly positive effect on net interest income.  These estimates are summarized below.

		Net interest income % change
Increase 200 bp		(0.32	)
Increase 100 bp		(1.69	)
Decrease 100 bp		0.85
Decrease 200 bp		(3.52	)

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Approximately $460 million loans are indexed to the prime rate, and have floors of 4% or higher.  Since the prime rate is currently 3.25%, rates would have to increase more than 75 basis points before the rates on such loans will increase.  This effect, captured in our simulation analysis above, moderately offsets the normal positive impact of rising rates.  Analysis of rates increasing more than 200 basis points indicates a positive effect on net interest income.

The scenario of rates decreasing 200 bp is not reasonably possible given current low rates for short-term instruments and most deposits.

Undesignated derivative instruments described in Note 20 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 non-interest income. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above.

The following table presents the increases in net interest income due to changes in rate and volume computed on a tax-equivalent basis and indicates how net interest income in 2010 and 2009 was impacted by volume increases and the lower average interest rate environment. The tax-equivalent adjustments are based on a 35% federal tax rate. The change in interest due to both rate and volume has been allocated to the change due to rate and the change due to volume in proportion to the relationship of the absolute dollar amounts of the change in each.

Taxable Equivalent Rate/Volume Analysis

		2010/2009									2009/2008
					Increase (decrease)									Increase (decrease)
					due to									due to
(In thousands)		Net change			Rate			Volume			Net change			Rate			Volume
Interest income
Loans		$	2,615		$	(1,632	)	$	4,247		$	(3,291	)	$	(9,008	)	$	5,717
Federal funds sold		59			28			31			(399		)	(616		)	217
Mortgage loans held for sale		(50		)	(34		)	(16		)	171			(16		)	187
Securities Taxable		(104		)	(666		)	562			131			(999		)	1,130
Tax-exempt		101			(327		)	428			163			50			113
Total interest income		2,621			(2,631		)	5,252			(3,225		)	(10,589		)	7,364
Interest expense
Deposits
Interest bearing demand deposits		18			(29		)	47			(464		)	(530		)	66
Savings deposits		46			19			27			68			53			15
Money market deposits		685			(86		)	771			(3,337		)	(3,877		)	540
Time deposits		(5,580		)	(4,102		)	(1,478		)	(2,798		)	(4,031		)	1,233
Securities sold under agreements to repurchase		61			29			32			(570		)	(413		)	(157		)
Federal funds purchased and other short-term borrowings		(18		)	(15		)	(3		)	(687		)	(642		)	(45		)
Federal Home Loan Bank advances		(1,075		)	(631		)	(444		)	(587		)	(362		)	(225		)
Long-term debt		(51		)	(49		)	(2		)	3,293			102			3,191
Total interest expense		(5,914		)	(4,864		)	(1,050		)	(5,082		)	(9,700		)	4,618
Net interest income		$	8,535		$	2,233		$	6,302		$	1,857		$	(889	)	$	2,746

Bancorp’s net interest income increased $8,535,000 for the year ended December 31, 2010 compared to the same period of 2009 while 2009 increased $1,857,000 compared to 2008.  Net interest income for 2010 compared to 2009 was positively impacted by an increase in loan and securities volume and a decrease in

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deposit and other borrowing rates, and the volume of liabilities.  Net interest income was negatively impacted by a decline in the average rate earned on assets.  Loan volume increases boosted net interest income by $4,247,000 and declining rates on deposits, particularly time deposits, contributed $4,198,000 to the increase of net interest income.  Partially offsetting the increases, declining rates on loans negatively impacted net interest income by $1,632,000.

For the year 2009 compared to 2008, loan growth accounted for $5,717,000 of the increase in interest income, offset by lower rates on loans which accounted for a decrease of $9,008,000.  Lower rates on deposits resulted in a decreased interest expense of $8,385,000, which was somewhat offset by increased interest expense of $4,618,000 due to higher volumes of liabilities.

Provision for Loan Losses

In determining the provision for loan losses charged to expense, management considers many factors. Among these are the quality and underlying collateral of the loan portfolio, previous loss experience, the size and composition of the loan portfolio and an assessment of the impact of current economic conditions on borrowers’ ability to pay. The provision for loan losses is summarized below:

(Dollars in thousands)		2010			2009			2008
Provision for loan losses		$	11,469		$	12,775		$	4,050
Allowance to loans at year end		1.69		%	1.39		%	1.14		%
Allowance to average loans for year		1.74		%	1.44		%	1.19		%

The provision for loan losses decreased $1,306,000 during 2010 compared to 2009 primarily due to a $4.1 million loan loss provision in 2009 related to a fraudulent loan. Excluding the fraudulent loan, the provision increased in response to Bancorp’s assessment of inherent risk in the loan portfolio.  The provision for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysis of the risk in the loan portfolio. The provision reflects an allowance methodology that is driven by risk ratings, and reflected the impact of downgrading various loans’ status due to the ongoing economic stress on borrowers witnessed from 2008 through 2010.  Ultimately, this required a higher provision.  Bancorp intends to continue with its historically conservative stance toward credit quality, remaining cautious in assessing the potential risk in the loan portfolio.

Non-performing loans increased from $12,101,000 at year-end 2009 to $19,314,000 at December 31, 2010.  The ratio of non-performing loans to total loans was 1.28% at December 31, 2010, up from 0.84% at December 31, 2009.  Net charge-offs totaled 40 basis points of average loans at year-end 2010, down from 0.59% at year-end 2009.  Contributing 30 basis points to the 2009 level of charge-offs was the fraudulent loan discussed above.  The increase in non-performing loans, including non-accrual loans, in 2010 reflected the reclassification of several unrelated loans to non-performing status due to the ongoing economic stress on borrowers witnessed from 2008 through 2010.  While Bancorp’s metrics for net charge-offs and non-performing loans remain at relatively low levels compared to the banking industry, management continues to feel that a prolonged recession could place additional pressure on credit quality in determining the provision and allowance for loan losses.  See “Financial Condition-Non-performing Loans and Assets” for further discussion of non-performing loans.  See “Financial Condition-Summary of Loan Loss Experience” for further discussion of loans charged off during the year.

The Bank’s loan portfolio is diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in the metropolitan areas of Louisville, Indianapolis and Cincinnati.  The adequacy of the allowance is monitored on an ongoing basis and it is the opinion of management that the balance of the allowance for loan losses at December 31, 2010 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date. See “Financial Condition-Allowance for Loan Losses” for more information on the allowance for loan losses.

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Non-Interest Income and Non-Interest Expenses

The following table provides a comparison of the components of non-interest income for 2010, 2009 and 2008. The table shows the dollar and percentage change from 2009 to 2010 and from 2008 to 2009. Below the table is a discussion of significant changes and trends.

											2010/2009					2009/2008
(Dollars in thousands)		2010			2009			2008			Change			%		Change			%
Investment management and trust services		$	13,260		$	11,180		$	12,203		$	2,080		18.6	%	$	(1,023	)	(8.4	)%
Service charges on deposit acccounts		8,600			8,531			8,692			69			0.8		(161		)	(1.9	)
Bankcard transaction revenue		3,313			2,909			2,645			404			13.9		264			10.0
Gain on sales of mortgage loans held for sale		2,321			2,163			1,253			158			7.3		910			72.6
Gain (loss) on sales of securities available for sale		159			(339		)	(607		)	498			(146.9	)	268			(44.2	)
Brokerage commissions and fees		2,136			1,749			1,797			387			22.1		(48		)	(2.7	)
Bank owned life insurance income		995			988			1,020			7			0.7		(32		)	(3.1	)
Other		2,955			2,855			1,240			100			3.5		1,615			130.2
		$	33,739		$	30,036		$	28,243		$	3,703		12.3	%	$	1,793		6.3	%

Total non-interest income increased 12.3% for the year ended December 31, 2010 compared to 2009. The largest component of non-interest income is investment management and trust services. Along with the effects of improving market conditions in 2009 and 2010, this area of the Bank continued to grow through attraction of new business and retention of existing business. Trust assets under management rose to $1.70 billion at December 31, 2010, compared to $1.55 billion at December 31, 2009.  Most fees earned for managing accounts are based on a percentage of market value on a monthly basis. Some revenues of the investment management and trust department, most notably executor fees, are non-recurring in nature and the timing of these revenues corresponds with the administration of estates. For 2010, 2009 and 2008 executor fees totaled approximately $668,000, $225,000 and $545,000, respectively. Also contributing to the increases in investment management and trust fees was the attraction of net new accounts, consisting primarily of personal accounts.

Service charges on deposit accounts increased $69,000 or 0.8%, for the year ended December 31, 2010 compared to the same period a year ago.  Service charge income is driven by transaction volume in deposit accounts, which can fluctuate throughout the year.  Recent legislation required that our customers “opt in” to access their overdraft protection beginning in the third quarter of 2010.  While it is difficult to predict the impact of this change, management believes this requirement will result in some decline in service charge income in 2011.

Bankcard transaction revenue increased $404,000 or 13.9% in 2010 compared to 2009 and primarily represents income the Bank derives from customers’ use of debit cards.  Results for 2010 compared favorably to 2009 as bankcard transaction volume continues to increase.  Most of this revenue is interchange income based on rates set by service providers in a competitive market. In the future, this rate will be set by the Federal Reserve Board for banks with at least $10 billion in assets.  While this threshold indicates we will not be directly affected due to our size, it is likely that this change will indirectly affect Bancorp. While there are many uncertainties about its effect, the potential limits related to interchange rates on debit card transactions proposed in the Dodd-Frank legislation may negatively impact this source of income.

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The Bank’s mortgage banking division originates residential mortgage loans to be sold in the secondary market. Interest rates on the loans sold are locked with the borrower and investor prior to closing the loans, thus Bancorp bears no interest rate risk related to these loans.  The division offers conventional, VA and FHA financing, for purchases and refinances, as well as programs for low-income first time home buyers. The mortgage banking division also offers home equity conversion mortgages or “reverse” mortgages insured by the U.S. Department of Housing and Urban Development (HUD). These HUD loans give homeowners 62 years of age or older a vehicle for converting equity in their homes to cash.  Gains on sales of mortgage loans increased $158,000, or 7.3%, in 2010 compared to 2009.  Interest rates on mortgage loans directly impact the volume of business transacted by the mortgage banking division. Prevailing mortgage interest rates fell substantially in late 2008 and have remained at attractive levels through 2009 and 2010 helping contribute to a solid loan volume — mostly refinance activity.  Also, the well-publicized availability of first-time homebuyer tax credits contributed to an increase in purchase activity in late 2009 and early 2010.  Volume, which reached an all-time high in 2009, declined slightly in 2010 but remained strong due to record low interest rates providing more refinance opportunities, while overall pricing on loans sold improved in 2010.

Gains on securities available for sale totaled 159,000 for 2010, compared to losses totaling $339,000 in 2009.  In the third quarter of 2010, for tax planning purposes, Bancorp sold securities with a cost of $26,905,000, resulting in gains totaling $159,000.  In 2009, Bancorp sold trust preferred securities, generating a loss of $359,000, and mortgage-backed securities, generating gains of $20,000. In 2008, Bancorp sold preferred securities of other bank holding companies, with a cost of $3,951,000, resulting in a loss of $607,000.

Brokerage commissions and fees earned primarily from stock, bond and mutual fund sales increased $387,000 or 22.1% for 2010 compared to the prior year.  These increases corresponded to higher overall brokerage volume, as retail investors exhibited increased confidence in the overall market and the economic outlook.  Bancorp deploys its brokers primarily through its branch network for retail consumers, while larger managed accounts are included in the investment management and trust department.

Income related to bank-owned life insurance (“BOLI”) was $995,000 in 2010 compared to $988,000 for 2009.  BOLI represents the cash surrender value for life insurance policies on certain key employees who have provided consent for the Bank to be the beneficiary of a portion of such policies.  The related change in cash surrender value and proceeds received under the policies, none of which have occurred to date, are recorded as non-interest income.  This income helps offset the cost of employee benefits.

Other non-interest income increased $100,000, or 3.5%, during 2010 compared to 2009 primarily due to an increase of the value of the domestic private investment fund.  Bancorp’s investment in a domestic private investment fund is comprised of bank and other financial industry securities and is accounted for in accordance with FASB ASC 323-10 “Investments — Equity Method and Joint Ventures”.  The fund increased in value by $606,000 in 2010, compared to $459,000 in 2009.  This increase is partially offset by a decrease in fees related to mortgage banking, such as title and application income, and a variety of other factors, none of which is individually significant.  Other non-interest income increased in 2009 compared to 2008 as a result of an increase in the value of the domestic private investment fund and increases in fees related to mortgage banking, combined with a variety of factors none of which are individually significant.

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The following table provides a comparison of the components of non-interest expenses for 2010, 2009 and 2008. The table shows the dollar and percentage change from 2009 to 2010 and from 2008 to 2009. Below the table is a discussion of significant changes and trends.

											2010/2009					2009/2008
(Dollars in thousands)		2010			2009			2008			Change			%		Change			%
Salaries and employee benefits		$	33,485		$	30,147		$	28,209		$	3,338		11.1	%	$	1,938		6.9	%
Net occupancy expense		4,934			4,185			4,247			749			17.9		(62		)	(1.5	)
Data processing expense		4,834			4,479			4,108			355			7.9		371			9.0
Furniture and equipment expense		1,272			1,234			1,117			38			3.1		117			10.5
FDIC insurance		2,038			2,687			621			(649		)	(24.2	)	2,066			332.7
Other		10,568			9,963			11,017			605			6.1		(1,054		)	(9.6	)
		$	57,131		$	52,695		$	49,319		$	4,436		8.4	%	$	3,376		6.8	%

Salaries and benefits are the largest component of non-interest expenses and increased $3,338,000 or 11.1% for 2010 compared to 2009.  This was primarily due to increases in salaries, profit-related bonus accruals and health insurance expense.  Increased staffing levels, mainly related to the expansion in Cincinnati, included senior staff with higher per capita salaries and contributed to the overall increase.  At December 31, 2010, the Bank had 475 full-time equivalent employees compared to 470 at the same date in 2009 and 464 for 2008.

Net occupancy expense increased $749,000 or 17.9% from 2009 to 2010, primarily due to an increase in rent expense, some of which was a one-time charge to reflect the impact of leases with escalation clauses recorded in 2010.  Other contributing factors were the addition of two new branches in the Cincinnati market, along with increases in utilities and property taxes.  The Bank opened two new locations in 2010, after opening no new locations in 2009 or 2008.  At December 31, 2010 the Bank had thirty banking center locations including the main office.

Data processing expense increased $355,000 or 7.9% largely due to increased trust data processing expenses related to tax document preparation in 2010.

Furniture and equipment expense increased $38,000 or 3.1% in 2010, as compared to 2009, due to a variety of factors, none of which is individually significant.  Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense.

FDIC insurance expense decreased $649,000, or 24.2% for the year ended December 31, 2010, as compared to the same period in 2009.  The decrease is due primarily to a $786,000 special assessment recorded in 2009, which did not recur in 2010.

Other non-interest expenses increased $605,000 for the year ended December 31, 2010 compared to the same period of 2009.  Included in this category are amortization expenses related to mortgage servicing rights (MSRs).  Mortgage volume increased the amount of MSRs over 2009 and 2010, resulting in a corresponding increase of MSR amortization of $230,000 in 2010 compared to 2009, and an impairment reversal of $176,000 in 2009.  The remaining increases in 2010 other non-interest expenses are related to an increase of $196,000 in professional fees and a variety of factors including advertising, printing, mail and telecommunications, none of which is individually significant.

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