S Y BANCORP INC - 10-Q Quarterly Report

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2005

OR

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 incorporation		(I.R.S. Employer
or organization)		Identification No.)

1040 East Main Street, Louisville, Kentucky, 40206
(Address of principal executive offices)
(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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý No o

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

Common Stock, no par value –
13,906,890 shares issued and outstanding at May 2, 2005

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Balance Sheets
March 31, 2005 and December 31, 2004
(In thousands, except share data)

	March 31,			December 31,
	2005			2004
Assets
Cash and due from banks	$	28,072		31,030
Federal funds sold	15,487			517
Mortgage loans held for sale	9,983			5,528
Securities available for sale (amortized cost of $153,783 in 2005 and $128,239 in 2004)	152,910			129,390
Securities held to maturity (approximate fair value of $4,928 in 2005 and $5,465 in 2004)	4,805			5,283
Loans	996,351			984,841
Less allowance for loan losses	12,580			12,521
Net loans	983,771			972,320

Premises and equipment, net	25,623			26,266
Accrued interest receivable and other assets	42,793			41,681

Total assets	$	1,263,444		1,212,015

Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	168,274		159,342
Interest bearing	834,711			790,741
Total deposits	1,002,985			950,083

Securities sold under agreements to repurchase and federal funds purchased	78,372			73,284
Other short-term borrowings	1,744			1,176
Accrued interest payable and other liabilities	23,197			20,026
Federal Home Loan Bank advances	20,000			30,000
Subordinated debentures	20,769			20,799
Total liabilities	1,147,067			1,095,368
Stockholders’ equity:
Preferred stock, no par value; 1,000,000 shares authorized; no shares issued or outstanding	—			—
Common stock, no par value; 20,000,000 shares authorized; 13,905,250 and 13,948,981 shares issued and outstanding in 2005 and 2004, respectively	7,227			7,373
Surplus	16,633			18,684
Retained earnings	93,412			90,170
Accumulated other comprehensive income (loss)	(895		)	420
Total stockholders’ equity	116,377			116,647

Total liabilities and stockholders’ equity	$	1,263,444		1,212,015

See accompanying notes to unaudited condensed consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Income
For the three months ended March 31, 2005 and 2004
(In thousands, except share and per share data)

	2005		2004
Interest income:
Loans	$	14,980	13,331
Federal funds sold	82		24
Mortgage loans held for sale	56		39
Securities - taxable	984		1,039
Securities - tax-exempt	347		358
Total interest income	16,449		14,791
Interest expense:
Deposits	4,303		3,111
Securities sold under agreements to repurchase and federal funds purchased	273		199
Other short-term borrowings	6		2
Federal Home Loan Bank advances	143		63
Subordinated debentures	465		466
Total interest expense	5,190		3,841
Net interest income	11,259		10,950
Provision for loan losses	225		500
Net interest income after provision for loan losses	11,034		10,450
Non-interest income:
Investment management and trust services	2,697		2,214
Service charges on deposit accounts	1,898		2,125
Bankcard transaction revenue	382		233
Gains on sales of mortgage loans held for sale	299		234
Brokerage commissions and fees	592		438
Other	627		443
Total non-interest income	6,495		5,687
Non-interest expenses:
Salaries and employee benefits	6,039		5,602
Net occupancy expense	850		706
Data processing expense	950		850
Furniture and equipment expense	299		270
State bank taxes	307		281
Other	2,162		1,889
Total non-interest expenses	10,607		9,598
Income before income taxes	6,922		6,539
Income tax expense	2,145		2,091

Net income	$	4,777	4,448

Net income per share:
Basic	$	0.34	0.33
Diluted	$	0.34	0.32
Average common shares:
Basic	13,955,062		13,608,495
Diluted	14,204,446		14,110,731

See accompanying notes to unaudited condensed consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2005 and 2004
(In thousands)

	2005			2004
Operating activities:
Net income	$	4,777		4,448
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	225			500
Depreciation, amortization and accretion, net	821			736
Gains on sales of mortgage loans held for sale	(299		)	(234	)
Origination of mortgage loans held for sale	(25,487		)	(22,429	)
Proceeds from sale of mortgage loans held for sale	21,331			20,097
Loss on the sale of other real estate	1			7
Income tax benefit of stock options exercised	195			268
(Increase) decrease in accrued interest receivable and other assets	(619		)	36
Increase (decrease) in accrued interest payable and other liabilities	3,171			(1,895	)
Net cash provided by operating activities	4,116			1,534
Investing activities:
Purchases of securities available for sale	(28,985		)	(37,162	)
Proceeds from sales of securities available for sale	—			—
Proceeds from maturities of securities available for sale	3,427			38,825
Proceeds from maturities of securities held to maturity	480			335
Net increase in loans	(11,676		)	(7,269	)
Purchases of premises and equipment	(166		)	(946	)
Proceeds from sales of other real estate	215			128
Net cash used by investing activities	(36,705		)	(6,089	)
Financing activities:
Net increase in deposits	52,902			4,760
Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased	5,088			(21,765	)
Net increase (decrease) in other short-term borrowings	568			(823	)
Proceeds of Federal Home Loan Bank advances	—			30,000
Repayments of Federal Home Loan Bank advances	(10,000		)	—
Repayments of subordinated debentures	(30		)	(30	)
Issuance of common stock for options exercised, dividend reinvestment plan and employee benefit plans	344			1,720
Common stock repurchases	(2,736		)	—
Cash dividends paid	(1,535		)	(1,085	)
Net cash provided by financing activities	44,601			12,777
Net increase in cash and cash equivalents	12,012			8,222
Cash and cash equivalents at beginning of period	31,547			34,076
Cash and cash equivalents at end of period	$	43,559		42,298
Supplemental cash flow information:
Income tax payments	$	—		—
Cash paid for interest	$	5,124		3,770
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	—		162

See accompanying notes to unaudited condensed consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the three months ended March 31, 2005
(In thousands, except share and per share data)

												Accumulated
	Common Stock											Other
	Number of								Retained			Comprehensive
	Shares		Amount			Surplus			Earnings			Income (Loss)			Total

Balance December 31, 2004	13,949		$	7,373		$	18,684		$	90,170		$	420		$	116,647

Net income	—		—			—			4,777			—			4,777

Change in other comprehensive income (loss), net of tax	—		—			—			—			(1,315		)	(1,315		)

Shares issued for stock options exercised, dividend reinvestment plan and employee benefit plans	71		236			303			—			—			539

Cash dividends, $0.11 per share	—		—			—			(1,535		)	—			(1,535		)

Shares repurchased	(115	)	(382		)	(2,354		)	—			—			(2,736		)

Balance March 31, 2005	13,905		$	7,227		$	16,633		$	93,412		$	(895	)	$	116,377

See accompanying notes to unaudited condensed consolidated financial statements.

S.Y. BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements (financial statements) have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The 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 financial statements include the accounts of S.Y. Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (Bank). All significant intercompany transactions have been eliminated in consolidation. Bancorp also owns S.Y. Bancorp Capital Trust I (the Trust), a Delaware statutory business trust that is a 100% owned finance subsidiary. The Trust is not consolidated in the financial statements of Bancorp. See note 4 to the financial statements below for more information on the Trust.

A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2004 included in S.Y. Bancorp, Inc.’s Annual Report on Form 10-K.

Interim results for the three month period ended March 31, 2005 are not necessarily indicative of the results for the entire year.

Critical Accounting Policies

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

Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” Bancorp has continued to apply the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock-Based Compensation,” for all stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method had been applied in measuring compensation costs.

No stock based compensation is reflected in net income because all options granted under the current stock incentive plan have an exercise price equal to the market price of Bancorp’s stock at the grant date. Bancorp discloses pro forma net income and earnings per share in the notes to its financial statements as if compensation were measured at the date of grant based on the fair value of the award and recognized over the service period.

Bancorp’s as reported and pro forma earnings per share information for the three months ended March 31 follows:

	Three Months Ended March 31
(In thousands, except per share data)	2005		2004

Net income, as reported	$	4,777	$	4,448
Less: stock-based compensation expense determined under fair value method, net of tax	80		65
Pro forma net income	$	4,679	$	4,383

Basic EPS:
As reported	$	0.34	$	0.33
Pro forma	0.34		0.32
Diluted EPS:
As reported	0.34		0.32
Pro forma	0.33		0.31

	2005		2004
Assumptions Used Option Valuation

Dividend Yield	1.70	%	1.48	%
Expected volatility	16.72	%	17.78	%
Risk Free Interest Rate	4.05	%	4.00	%
Expected life of options (in years)	7.0		7.0

(2) Allowance for Loan Losses

An analysis of the changes in the allowance for loan losses for the three months ended March 31 follows:

(In thousands)	2005			2004

Beginning balance	$	12,521		11,798
Provision for loan losses	225			500
Loans charged off	(336		)	(485	)
Recoveries	170			271

Ending balance	$	12,580		12,084

(3) Federal Home Loan Bank Advances

Under a blanket collateral agreement with the Federal Home Loan Bank of Cincinnati and secured by certain residential real estate loans, the Bank has borrowed $20,000,000 via two separate fixed rate, non-callable advances of $10,000,000. The advances are due in February of 2006 and 2007, respectively, with a weighted average rate of 2.45%. Interest payments are due monthly, with principal due at maturity.

(4) Subordinated Debentures

On June 1, 2001, S.Y. Bancorp Capital Trust I (the Trust), a Delaware statutory business trust and 100%-owned finance subsidiary of Bancorp, issued $20.0 million of 9.00% Cumulative Trust Preferred Securities (Securities) which will mature on June 30, 2031, but prior redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. The principal asset of the Trust is a $20.0 million subordinated debenture of Bancorp. The subordinated debenture bears interest at the rate of 9.00% and matures June 30, 2031, subject to prior redemption under certain circumstances. Bancorp owns all of the common securities of the Trust.

The Securities, the assets of the Trust, and the common securities issued by the Trust are redeemable in whole or in part on or after June 30, 2006, or at any time in whole, but not in part, from the date of issuance upon the occurrence of certain events. The Securities are included in Tier 1 capital for regulatory capital adequacy determination purposes, subject to certain limitations.

The obligations of Bancorp with respect to the issuance of the Securities constitute a full and unconditional guarantee by Bancorp of the Trust’s obligation with respect to the Securities.

Subject to certain exceptions and limitations, Bancorp may, from time to time, defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the related Securities and, with certain exceptions, prevent Bancorp from declaring or paying cash distributions on Bancorp’s common stock or debt securities that rank pari passu or junior to the subordinated debenture.

Prior to 2003, the Trust was consolidated in Bancorp’s financial statements, with the trust preferred securities issued by the Trust reported in liabilities as “Long Term Debt – Trust Preferred Securities” and the subordinated debentures eliminated in consolidation. Under FASB Interpretation No. 46, as revised in December 2003, the Trust is no longer consolidated with Bancorp. Accordingly, Bancorp does not report the securities issued by the Trust as liabilities, and instead reports as liabilities the subordinated debentures issued by Bancorp and held by the Trust, as these are no longer eliminated in consolidation. The amount of the subordinated debentures as of March 31, 2005 and December 31, 2004 was $20,619,000. In applying this FASB Interpretation, Bancorp recorded the investment in the common securities issued by the Trust and a corresponding obligation of the Trust’s subordinated debentures as well as interest income and interest expense on this investment and obligation. The application of this FASB Interpretation has been reflected in all applicable prior periods.

The Bank also had subordinated debentures outstanding amounting to $150,000 at March 31, 2005 and $180,000 at December 31, 2004. Interest due on these debentures is at a variable rate equal to one percent less than the Bank’s prime rate adjusted annually on January 1. For 2005, the rate on these debentures was 4.25% and for 2004 the rate was 3.00%. The debentures are subordinated to the claims of creditors and depositors of the Bank and are subject to redemption by the Bank at the principal amount outstanding, upon the earlier of the death of the registered owners, or an event of default by the registered owners with respect to loans from the Bank. While the debentures mature in 2049, the owners may redeem the debentures at any time.

(5) Intangible Assets

Statement of Financial Accounting Standards No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”), requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Annual evaluations have resulted in no charges for impairment. Bancorp currently has unamortized goodwill remaining from the acquisition of a bank in southern Indiana in the amount of $682,000. This goodwill is assigned to the commercial and retail banking segment of Bancorp.

(6) Defined Benefit Retirement Plan

The Bank sponsors an unfunded, non-qualified, defined benefit retirement plan for certain key officers. Benefits vest based on years of service. The Bank does not make contributions to this plan. Information about the components of the net periodic benefit cost of the defined benefit plan follows:

	Three Months
	Ended March 31,
(Dollars in thousands)	2005		2004
Components of net periodic benefit cost:
Service cost	$	—	—
Interest cost	30		30
Expected return on plan assets	—		—
Amortization of prior service cost	—		2
Amortization of the net loss	8		8

Net periodic benefit cost	$	38	40

(7) Commitments to Extend Credit

As of March 31, 2005, Bancorp had various commitments outstanding that arose in the normal course of business, such as standby letters of credit and commitments to extend credit, which are properly not reflected in the financial statements. In management’s opinion, commitments to extend credit of $212,758,000, including standby letters of credit of $14,997,000, represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of March 31, 2005. Commitments to extend credit were $261,582,000, including letters of credit of $13,774,000, as of December 31, 2004. Bancorp’s exposure to credit loss in the event of nonperformance by the other party to these commitments is represented by the contractual amount of these instruments. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. At March 31, 2005, no amounts have been accrued in the financial statements related to these instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Bancorp upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

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

(8) Preferred Stock

At Bancorp’s annual meeting of shareholders held in April 2003, the shareholders approved an amendment to the Articles of Incorporation to create a class of preferred stock and authorize 1,000,000 shares of this preferred stock with no par value. The relative rights, preferences and other terms of this stock or any series within the class will be determined by the Board of Directors prior to any issuance. Some of this preferred stock will be used in connection with a shareholders’ rights plan upon the occurrence of certain triggering events. None of this stock has been issued as of March 31, 2005.

(9) Net Income Per Share

The following table reflects, for the three month periods ended March 31, 2005 and 2004, net income (the numerator) and average shares outstanding (the denominator) for the basic and diluted net income per share computations (in thousands except per share data):

	Three Months
	Ended March 31,
	2005		2004

Net income, basic and diluted	$	4,777	4,448

Average shares outstanding	13,955		13,608
Effect of dilutive securities	249		503

Average shares outstanding including dilutive securities	14,204		14,111

Net income per share, basic	$	0.34	0.33
Net income per share, diluted	$	0.34	0.32

(10) Segments

The Bank’s, and thus Bancorp’s, principal activities include commercial and retail banking and investment management and trust. Commercial and retail banking provides a full range of loan and deposit products to individual consumers and businesses. Investment management and trust provides wealth management services including brokerage, estate planning and administration, retirement plan management, and custodian or trustee services.

The financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. The measurement of the performance of the business segments is based on the management structure of the Bank and is not necessarily comparable with similar information for any other financial institution. The information presented is also not necessarily indicative of the segments’ operations, if they were independent entities.

Selected financial information by business segment for the quarter ended March 31, 2005 and 2004 follows:

	Three Months Ended March 31
(In thousands)	2005		2004

Net interest income:
Commercial and retail banking	$	11,190	10,741
Investment management and trust	69		209

Total	$	11,259	10,950

Non-interest income:
Commercial and retail banking	$	3,206	3,035
Investment management and trust	3,289		2,652

Total	$	6,495	5,687

Net income:
Commercial and retail banking	$	3,813	3,753
Investment management and trust	964		695

Total	$	4,777	4,448

Principally, all of the net assets of S.Y. Bancorp, Inc. are involved in the commercial and retail banking segment.

S.Y. BANCORP, INC. AND SUBSIDIARY

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This item discusses the results of operations for S.Y. Bancorp, Inc. (Bancorp), and its subsidiary, Stock Yards Bank & Trust Company for the three month period ended March 31, 2005 and compares that period with the same period of the previous year. Unless otherwise indicated, all references in this discussion to the “Bank” include Bancorp. In addition, the discussion describes the significant changes in the financial condition of Bancorp and the Bank that have occurred during the first three months of 2005 compared to December 31, 2004. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. 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 the following: economic conditions both generally and more specifically in the markets in which Bancorp and its subsidiaries operate; competition for Bancorp’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, results of operations, or financial condition of Bancorp’s customers; other risks detailed in Bancorp’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.

Overview of 2005 through March 31

The first three months of 2005 proved the value of our Company’s diverse revenue stream. As net interest margin fell during the quarter due to a flattening yield curve and increased competition, Bancorp was able to show solid growth in other areas such as investment management and trust, mortgage banking and brokerage services. These factors helped Bancorp complete the first quarter of the year with net income exceeding the comparable period of 2004 by 7.40%.

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 the rates on those deposits directly impacts profitability. Business volumes are influenced by overall economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.

Net interest income for the first quarter of 2005 increased 2.82% as compared to the prior year as growth in interest income outpaced that of interest expense. Loan growth during the first quarter of 2005 was solid as loans grew 11.53% over the first quarter last year. This helped interest income to increase 11.21% from the first quarter of 2004. To help fund expected loan growth, Company management pursued several deposit promotions during the quarter, reducing net interest margin in the short term. Ultimately, management’s strategy is to lock in lower cost funds in a rising interest rate environment. These deposit promotions led to deposit balances which were 13.12% or approximately $116 million over the level from one year ago. Growth in deposit volume along with higher interest rates on many accounts led to a 35.12% or $1.349 million increase in interest expense.

Net Interest Income

The following tables present the average balance sheets for the three month periods ended March 31, 2005 and 2004 along with the related calculation of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. See the notes following the tables for further explanation.

	For the three months ended						For the three months ended
	March 31, 2005						March 31, 2004
	Average				Average		Average				Average
(Dollars in thousands)	Balances		Interest		Rate		Balances		Interest		Rate

Earning assets
Federal funds sold	$	12,747	$	82	2.61	%	$	10,077	$	24	0.96	%
Mortgage loans held for sale	4,576		56		4.96	%	2,739		39		5.73	%
Securities
Taxable	99,903		984		3.99	%	106,648		1,039		3.92	%
Tax-exempt (4)	36,751		496		5.47	%	38,538		512		5.34	%
Loans, net of unearned income (4)	995,830		15,028		6.12	%	889,672		13,392		6.05	%

Total earning assets	1,149,807		16,646		5.87	%	1,047,674		15,006		5.76	%

Less allowance for loan losses	12,790						12,200

	1,137,017						1,035,474

Non-earning assets
Cash and due from banks	32,818						30,772
Premises and equipment	25,957						24,009
Accrued interest receivable and other assets	41,625						21,448

Total assets	$	1,237,417					$	1,111,703

Interest bearing liabilities
Deposits
Interest bearing demand deposits	$	254,039	$	710	1.13	%	$	271,885	$	517	0.76	%
Savings deposits	45,385		39		0.35	%	44,222		11		0.10	%
Money market deposits	161,678		777		1.95	%	104,273		116		0.45	%
Time deposits	357,157		2,777		3.15	%	308,917		2,467		3.21	%
Securities sold under agreements to repurchase and federal funds purchased	73,112		273		1.51	%	79,077		199		1.01	%
Other short-term borrowings	1,010		6		2.41	%	1,441		2		0.56	%
Long-term debt	46,775		609		5.28	%	32,998		529		6.45	%

Total interest bearing liabilities	939,156		5,191		2.24	%	842,813		3,841		1.83	%

Non-interest bearing liabilities
Non-interest bearing demand deposits	159,448						145,183
Accrued interest payable and other liabilities	20,743						20,073

Total liabilities	1,119,347						1,008,069

Stockholders’ equity	118,070						103,634

Total liabilities and stockholders’ equity	$	1,237,417					$	1,111,703

Net interest income(1)			$	11,455					$	11,165

Net interest spread(2)					3.63	%					3.93	%

Net interest margin(3)					4.04	%					4.29	%

Provision for Loan Losses

The allowance for loan losses is based on management’s continuing review of individual loans, loss experience, current economic conditions, risk characteristics of the various categories of loans, and such other factors that, in management’s judgment, require current recognition in estimating loan losses.

An analysis of the changes in the allowance for loan losses and selected ratios follows:

	Three Months Ended March 31
(Dollars in thousands)	2005				2004

Balance at the beginning of the period	$		12,521		11,798
Provision for loan losses	225				500
Loan charge-offs, net of recoveries	(166			)	(214	)

Balance at the end of the period	$		12,580		12,084

Average loans, net of unearned income	$	995,830			889,672

Provision for loan losses to average loans (1)	0.02			%	0.06	%

Net loan charge-offs to average loans (1)	0.02			%	0.02	%

Allowance for loan losses to average loans	1.26			%	1.36	%
Allowance for loan losses to period-end loans	1.26			%	1.35	%

(1) Amounts not annualized

The provision for loan losses declined 55.00% during the first three months of 2005 as compared to the same period in 2004 in consideration of several factors, all of which estimate the level of inherent risk in the loan portfolio. Net charge-offs were down 22.43% from the level one year ago and at their lowest level in over three years. Non-performing loans increased 50.27% compared with the prior year, but the increase represented loans previously identified by Bancorp’s review process and, accordingly, already included in allocations to the allowance for loan losses. Bancorp’s process of evaluating the inherent risk in the portfolio considers, among other things, past due information, historic losses and information about specific borrower situations. Based on a review of all available information, management considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio.

Non-interest Income and Expenses

The following table sets forth the major components of non-interest income and expenses for the three month periods ended March 31, 2005 and 2004.

	Three Months Ended March 31
(In thousands)	2005		2004

Non-interest income:
Investment management and trust services	$	2,697	2,214
Service charges on deposit accounts	1,898		2,125
Bankcard transaction revenue	382		233
Gains on sales of mortgage loans held for sale	299		234
Brokerage commissions and fees	592		438
Other	627		443

Total non-interest income	$	6,495	5,687

Non-interest expenses:
Salaries and employee benefits	6,039		5,602
Net occupancy expense	850		706
Data processing expense	950		850
Furniture and equipment expense	299		270
State bank taxes	307		281
Other	2,162		1,889

Total non-interest expenses	$	10,607	9,598

Total non-interest income increased $808,000 or 14.21% for the first quarter of 2005 compared to the same period in 2004.

Investment management and trust services income increased $483,000 or 21.82% in the first quarter of 2005, as compared to the same period in 2004. The trust company continues to add new and profitable relationships and the addition of new accounts continues to help grow assets under management. Trust assets under management at March 31, 2005 were $1.37 billion, compared to $1.34 billion at December 31, 2004 and $1.25 billion at March 31, 2004. Trust assets are expressed in terms of market value. In addition to adding new accounts, assets under management are affected directly by the performance of the equity and bond markets.

Service charges on deposit accounts decreased $227,000 or 10.68% in the first quarter of 2005 as compared to the same period in 2004. Several factors contributed to the decline in service charges, including lower activity levels during the quarter, the impact of free business checking and the impact of higher interest rates on commercial analysis accounts. Higher interest rates generate larger earnings credits which serve to offset service charge revenues. Management is exploring several opportunities to improve the results in this area.

Bankcard transaction revenue increased $149,000 or 63.95% in the first quarter of 2005 compared to the same period in 2004. Results in 2005 compared favorably to 2004 as both transaction volume and interchange rates have increased. Additionally, the Bank began offering business debit cards in early 2004, and that volume has increased significantly generating more

fee income. This source of revenue should continue to increase as more and more customers utilize this convenient payment source.

Gains on sales of mortgage loans were $299,000 in the first quarter of 2005 and $234,000 in 2004. This represents an increase of 27.78%. A strong sales effort and resulting increases in volume provided a welcomed lift to the mortgage company as results improved significantly over a rough quarter in 2004.

Brokerage commissions and fees increased $154,000 or 35.16% in the first quarter of 2005 as compared to the same period in 2004. The brokerage department has continued its strong sales momentum from 2004 and hopes to build on that in 2005. Bancorp continues to be excited about offering a full compliment of financial services to its customer base and feels brokerage services are a key component of that strategy.

Other non-interest income increased $184,000 or 41.53% in the first quarter of 2005 as compared to 2004. The primary reason for the increase was the Bank’s purchase of $20 million in bank-owned life insurance during the third quarter of 2004. Income related to bank-owned life insurance was $220,000 for the first quarter of 2005. Offsetting factors, though not as significant, were declines in check cashing and title service fees.

Total non-interest expenses increased $1,009,000 or 10.51% for the first quarter of 2005 as compared to the same period in 2004. Salaries and employee benefits increased $437,000, or 7.80%, for the first quarter of 2005 compared to 2004. The increase in the first quarter came from regular salary increases, and new employees added to support the Bank’s growth. The Bank had 418 full time equivalent employees as of March 31, 2005 and 392 full time equivalents as of March 31, 2004. Net occupancy expense increased $144,000 or 20.40% in the first quarter of 2005 as compared to 2004. The increases are largely a result of opening new branch facilities, including three new branches since the first quarter of 2004. Data processing expense increased $100,000 or 11.76% for the first quarter of 2005 compared to 2004 primarily as a result of investments in upgraded equipment as Bancorp continues to improve its infrastructure in support of current and anticipated growth. Furniture and equipment expense increased $29,000 or 10.74% for the first quarter of 2005 compared to 2004. This increase is consistent with the increase in net occupancy expense and is primarily a result of the expansion in the number of banking facilities. State bank taxes were up $26,000 or 9.25% for the first quarter of 2005 compared to 2004. State bank taxes are primarily based on capital levels and increase as capital levels increase. Other non-interest expenses increased $273,000 or 14.45% in the first quarter of 2005 as compared to 2004. The increase in other non-interest expenses for the first quarter is primarily related to a variety of factors including increased operating expenses related to marketing and advertising, expenses related to loan collection of efforts and losses on fraudulent activity.

Income Taxes

Bancorp had income tax expense of $2,145,000 for the first three months of 2005, compared to $2,091,000 for the same period in 2004. The effective rate for each three month period was 30.98% in 2005 and 31.98% in 2004. The decline in the effective tax rate for 2005 primarily relates to tax-exempt income from Bancorp’s bank-owned life insurance policies.

(b) Financial Condition

Balance Sheet

Total assets increased $51,429,000 or 4.24% from $1.212 billion on December 31, 2004 to $1.263 billion on March 31, 2005. Average assets for the first three months of 2005 were $1.237

billion. Total liabilities increased $51,699,000 or 4.72% from $1.095 billion on December 31, 2004 to $1.147 billion on March 31, 2005. Average liabilities for the first three months of 2005 were $1.119 billion.

Since year end, loans have increased approximately $11,510,000 and securities have grown by $23,042,000. This growth was funded primarily through growth in deposits which were up $52,902,000. Growth in deposits was driven by several deposit promotions during the quarter as management raised what it believes will be relatively low-cost deposits over the long-term.

Non-performing Loans and Assets

Non-performing loans, which included non-accrual loans of $6,142,000 and loans past due over 90 days and still accruing of $748,000, totaled $6,890,000 at March 31, 2005. Non-performing loans were $5,640,000 at December 31, 2004. This represents 0.69% of total loans at March 31, 2005 compared to 0.57% at December 31, 2004. This increase is largely the result of long court processes necessary to resolve past due loan status. The ratio of allowance for loan losses to non-performing loans was 182.6% at March 31, 2005 and 222.0% at December 31, 2004.

Non-performing assets, which include non-performing loans, other real estate and repossessed assets, totaled $10,040,000 at March 31, 2005 and $9,037,000 at December 31, 2004. This represents 0.79% of total assets at March 31, 2005 compared to 0.75% at December 31, 2004 and a 22.16% increase in non-performing loans and an 11.10% increase in non-performing assets in the first quarter.

Many of the loans added to non-accrual status during the first quarter were previously included in Bancorp’s watchlist and therefore were considered in the allocation analysis of the allowance for loan losses prior to the first quarter of 2005.

(c) Liquidity

The role of liquidity is to ensure that funds are available to meet depositors’ withdrawal and borrowers’ credit demands. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet demand is provided by maturing assets, short-term liquid assets that can be converted to cash, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than the market rate.

The Bank has a number of sources of funds to meet its liquidity needs on a daily basis. The deposit base, consisting of relatively stable consumer and commercial deposits, and large denomination ($100,000 and over) certificates of deposit, is a source of funds. The majority of these deposits are from long-term customers and are a stable source of funds. The Bank has no brokered deposits.

Other sources of funds available to meet daily needs include the sale of securities under agreements to repurchase and funds made available under a treasury tax and loan note agreement with the federal government. Also, the Bank is a member of the Federal Home Loan Bank of Cincinnati (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. Additionally, the Bank has an available line of credit and federal funds purchased lines with correspondent banks totaling $58 million.

Bancorp’s liquidity depends primarily on the dividends paid to it as the sole shareholder of the Bank. At March 31, 2005, the Bank may pay up to $28,060,000 in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank. During the first three months of 2005 the Bank paid dividends to Bancorp totaling $1,535,000.

(d) Capital Resources

At March 31, 2005, stockholders’ equity totaled $116,377,000, a decrease of $270,000 since December 31, 2004. Accumulated other comprehensive income (loss) which for Bancorp consists of net unrealized gains (losses) on securities available for sale and a minimum pension liability adjustment, both of which are net of taxes, was a loss of $895,000 at March 31, 2005 and a gain of $420,000 at December 31, 2004. The change since year end is attributed soley to securities available for sale and a reflection of the effect of rising interest rates on the valuation of the Bank’s portfolio of securities available for sale. Also reducing stockholders’ equity was the repurchase of shares under Bancorp’s repurchase plan during the quarter. Please see the statement of changes in stockholders’ equity for more detail.

S.Y. Bancorp Capital Trust I, a subsidiary of Bancorp, issued $20.0 million of 9.00% Cumulative Trust Preferred Securities in June 2001. The issue was sold in a public offering. Bancorp used approximately $13.3 million of the net proceeds from this offering to reduce indebtedness outstanding under a line of credit with an unaffiliated bank. The remaining net proceeds were used for making additional capital contributions to the Bank, for repurchases of common stock, and for general corporate purposes. The trust preferred securities increased Bancorp’s regulatory capital and allowed for the continued growth of its banking franchise. The ability to treat these trust preferred securities as regulatory capital under Federal Reserve guidelines, coupled with the Federal income tax deductibility of the related expense, provides Bancorp with a cost-effective form of capital. See note 4 to the unaudited condensed consolidated financial statements for more information on the trust preferred securities which are now accounted for as subordinated debentures in Bancorp’s financial statements.

Bank holding companies and their subsidiary banks are required by regulators to meet risk based capital standards. These standards, or ratios, measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The values of both balance sheet and off-balance sheet items are adjusted to reflect credit risks.

The following table sets forth Bancorp’s risk based capital amounts and ratios as of March 31:

	March 31,
	2005				2004
	Amount		Ratio		Amount		Ratio

Tier 1 capital	$	136,262	13.59	%	$	123,341	13.92	%
For capital adequacy purposes	40,101		4.00	%	35,434		4.00	%
To be well capitalized	60,151		6.00	%	53,152		6.00	%

Total risk adjusted capital	$	148,944	14.86	%	$	134,607	15.20	%
For capital adequacy purposes	80,201		8.00	%	70,869		8.00	%
To be well capitalized	100,252		10.00	%	88,586		10.00	%

Leverage ratio (tier 1 capital)	$	136,262	11.00	%	$	123,341	11.10	%
For capital adequacy purposes	37,143		3.00	%	33,332		3.00	%
To be well capitalized	61,905		5.00	%	55,554		5.00	%

All ratios exceed the minimum required by regulators to be well capitalized. To be categorized as well capitalized, Bancorp must maintain a Tier 1 ratio of at least 6%; a total risk-based capital ratio of at least 10%; and a leverage ratio of at least 5%.

(e) Recently Issued Accounting Pronouncements

In November 2003, the Emerging Issues Task Force (EITF) issued EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary and the measurement of an impairment loss. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and Bancorp began presenting the new disclosure requirements in its consolidated financial statements for the year ended December 31, 2003. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position to provide additional implementation guidance.

In December 2003, the Accounting Standards Executive Committee, (AcSEC) issued SOP 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” (SOP 03-3) effective for loans acquired in fiscal years beginning after December 15, 2004. The scope of SOP 03-3 applies to “problem” loans that have been acquired, either individually in a portfolio, or in an acquisition. These loans must have evidence of credit deterioration and the purchaser must not expect to collect contractual cash flows. SOP 03-3 updates Practice Bulletin (PB) No. 6, “Amortization of Discounts on Certain Acquired Loans,” for more recently issued literature, including FASB Statements No. 114, “Accounting by Creditors for Impairment of a Loan”; No. 115, “Accounting for Certain Investments in Debt and Equity Securities”; and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities”. Additionally, it addresses FASB Statement No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” which requires that discounts be recognized as an adjustment of yield over a loan’s life.

SOP 03-3 states that an institution may no longer display discounts on purchased loans within the scope of SOP 03-3 on the balance sheet and may not carry over the allowance for loan losses. For those loans within the scope of SOP 03-3, this statement clarifies that a buyer cannot carry over the seller’s allowance for loan losses for the acquisition of loans with credit deterioration. Loans acquired with evidence of deterioration in credit quality since origination will need to be accounted for under a new method using an income recognition model. This prohibition also applies to purchases of problem loans not included in a purchase business combination, which would include syndicated loans purchased in the secondary market and loans acquired in portfolio sales. The adoption of SOP 03-3 in 2005 did not have a material impact on Bancorp’s consolidated financial statements.

In December 2004, FASB issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. SFAS No. 123R eliminates the ability to account for stock-based compensation using APB No. 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. SFAS No. 123R was originally effective on July 1, 2005, but the Securities and Exchange Commission (SEC) delayed the effective date to the first interim period in the first fiscal year

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information required by this item is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. Controls and Procedures

Bancorp maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in reports it files with the Securities and Exchange Commission (SEC), and to record, process, summarize and report this information within the time periods specified in the rules and forms of the SEC. Based on their evaluation of Bancorp’s disclosure controls and procedures as of the end of the quarterly period covered by this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that Bancorp is able to collect, process and disclose the information it is required to disclose in reports it files with the SEC within the required time periods.

Based on the evaluation of Bancorp’s disclosure controls and procedures by the Chief Executive and Chief Financial Officers, no changes occurred during the fiscal quarter ended March 31, 2005 in Bancorp’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Bancorp’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 2. Unregistered Sales of Equity and Use of Proceeds

The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended March 31, 2005.

				Total Number of Shares	Maximum Number of
	Total Number of	Average Price		Purchased as Part of	Shares that May Yet Be
	Shares Purchased	Paid Per Share		Publicly Announced Plan	Purchased Under the Plan

Jan 1 - Jan 31	24,700	$	24.09	24,700	140,158
Feb 1 - Feb 28	37,100	24.06		37,100	536,300
Mar 1 - Mar 31	53,064	23.52		53,064	483,236

Total	114,864	$	23.82	114,864	483,236

The board of directors of S.Y. Bancorp, Inc. approved a 400,000 share buyback plan in 1999. The plan had no expiration date. In February 2005, the Directors of Bancorp expanded this plan to allow for the repurchase of up to 550,000 shares between February 2005 and February 2006.

	Net Interest Income Change

Increase 200bp	12.20	%
Increase 100bp	6.08
Decrease 100bp	(6.08	)
Decrease 200bp	(11.77	)

Exhibit Number		Description of Exhibit

31.1		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act by David P. Heintzman
31.2		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act by Nancy B. Davis
32		Certifications pursuant to 18 U.S.C. Section 1350

			S.Y. BANCORP, INC.

Date:		May 9, 2005		By:	/s/ David P. Heintzman
					David P. Heintzman, Chairman,
					President & Chief Executive Officer

Date:	May 9, 2005			By:	/s/ Nancy B. Davis
					Nancy B. Davis, Executive Vice
					President, Treasurer and Chief
					Financial Officer

–		Unaudited Condensed Consolidated Balance Sheets March 31, 2005 and December 31, 2004

–		Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2005 and 2004

–		Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004

–		Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2005

–		Unaudited Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2005 and 2004

–		Notes to Unaudited Condensed Consolidated Financial Statements

1040 East Main Street, Louisville, Kentucky, 40206 (Address of principal executive offices) (Zip Code)

Net Interest Income

Interest Rate Simulation Sensitivity Analysis

1040 East Main Street, Louisville, Kentucky, 40206
(Address of principal executive offices)
(Zip Code)