Stock Yards Bancorp (SYBT) 10-Q 2004 Q3 Quarterly report

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

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

For the quarterly period ended September 30, 2004

OR

oTRANSITION 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 or organization)	(I.R.S. Employer 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 –

13,882,792 shares issued and outstanding at November 2, 2004

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

The following consolidated financial statements of S.Y. Bancorp, Inc. and Subsidiary, Stock Yards Bank & Trust Company, are submitted herewith:

• Unaudited Condensed Consolidated Balance Sheets
September 30, 2004 and December 31, 2003

• Unaudited Condensed Consolidated Statements of Income
for the three months ended September 30, 2004 and 2003

• Unaudited Condensed Consolidated Statements of Income
for the nine months ended September 30, 2004 and 2003

• Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2004 and 2003

• Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity
for the nine months ended September 30, 2004

• Unaudited Condensed Consolidated Statement of Comprehensive Income
for the three months ended September 30, 2004 and 2003

• Unaudited Condensed Consolidated Statement of Comprehensive Income
for the nine months ended September 30, 2004 and 2003

• Notes to Unaudited Condensed Consolidated Financial Statements

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Balance Sheets

September 30, 2004 and December 31, 2003

(In thousands, except share data)

	September 30, 2004				December 31, 2003
Assets
Cash and due from banks	$			29,046	31,911
Federal funds sold	9,830				2,165
Mortgage loans held for sale	3,118				3,157
Securities available for sale (amortized cost of $155,321 in 2004 and $152,951 in 2003)	157,691				155,691
Securities held to maturity (approximate fair value of $5,631 in 2004 and $6,244 in 2003)	5,390				5,915
Loans	932,812				886,153
Less allowance for loan losses	12,483				11,798
Net loans	920,329				874,355
Premises and equipment, net	26,418				24,785
Accrued interest receivable and other assets	40,921				20,542
Total assets	$			1,192,743	1,118,521
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$		164,925		143,901
Interest bearing	757,092				737,965
Total deposits	922,017				881,866
Securities sold under agreements to repurchase and federal funds purchased	85,395				92,102
Other short-term borrowings	1,286				1,232
Accrued interest payable and other liabilities	19,736				22,078
Federal Home Loan Bank advances	30,000				—
Subordinated debentures	20,799				20,829
Total liabilities	1,079,233				1,018,107
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; 13,882,792 and 13,575,316 shares issued and outstanding in 2004 and 2003, respectively	7,152				6,128
Surplus	18,335				16,153
Retained earnings	86,791				76,659
Accumulated other comprehensive income	1,232				1,474
Total stockholders’ equity	113,510				100,414
Total liabilities and stockholders’ equity	$	1,192,743			1,118,521

See accompanying notes to unaudited condensed consolidated financial statements.

2

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Income

For the three months ended September 30, 2004 and 2003

(In thousands, except share and per share data)

	2004		2003
Interest income:
Loans	$	13,641	13,540
Federal funds sold	87		90
Mortgage loans held for sale	53		250
Securities - taxable	983		951
Securities - tax-exempt	357		278
Total interest income	15,121		15,109
Interest expense:
Deposits	3,326		3,564
Securities sold under agreements to repurchase and federal funds purchased	239		146
Other short-term borrowings	2		3
Federal Home Loan Bank advances	160		—
Subordinated debentures	466		466
Total interest expense	4,193		4,179
Net interest income	10,928		10,930
Provision for loan losses	180		300
Net interest income after provision for loan losses	10,748		10,630
Non-interest income:
Investment management and trust services	2,361		2,071
Service charges on deposit accounts	2,323		2,205
Bankcard transaction revenue	337		246
Gains on sales of mortgage loans held for sale	235		739
Gains on sales of securities available for sale	—		10
Brokerage commissions and fees	371		372
Other	608		649
Total non-interest income	6,235		6,292
Non-interest expenses:
Salaries and employee benefits	5,236		5,504
Net occupancy expense	803		677
Data processing expense	870		794
Furniture and equipment expense	314		273
State bank taxes	306		270
Other	2,173		2,005
Total non-interest expenses	9,702		9,523
Income before income taxes	7,281		7,399
Income tax expense	2,310		2,418
Net income	$	4,971	4,981
Net income per share:
Basic	$	0.36	0.37
Diluted	$	0.35	0.36
Average common shares:
Basic	13,843,237		13,499,811
Diluted	14,191,637		13,972,646

See accompanying notes to unaudited condensed consolidated financial statements.

3

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Income

For the nine months ended September 30, 2004 and 2003

(In thousands, except share and per share data)

	2004		2003
Interest income:
Loans	$	40,233	40,637
Federal funds sold	155		298
Mortgage loans held for sale	162		650
Securities - taxable	3,026		2,759
Securities - tax-exempt	1,073		799
Total interest income	44,649		45,143
Interest expense:
Deposits	9,335		11,437
Securities sold under agreements to repurchase and federal funds purchased	609		474
Other short-term borrowings	6		6
Federal Home Loan Bank advances	383		—
Subordinated debentures	1,397		1,398
Total interest expense	11,730		13,315
Net interest income	32,919		31,828
Provision for loan losses	1,490		1,900
Net interest income after provision for loan losses	31,429		29,928
Non-interest income:
Investment management and trust services	7,017		6,156
Service charges on deposit accounts	6,761		6,184
Bankcard transaction revenue	895		781
Gains on sales of mortgage loans held for sale	845		2,175
Gains on sales of securities available for sale	—		10
Brokerage commissions and fees	1,281		913
Other	1,676		1,873
Total non-interest income	18,475		18,092
Non-interest expenses:
Salaries and employee benefits	16,603		16,154
Net occupancy expense	2,190		1,910
Data processing expense	2,545		2,550
Furniture and equipment expense	872		753
State bank taxes	883		818
Other	6,239		6,219
Total non-interest expenses	29,332		28,404
Income before income taxes	20,572		19,616
Income tax expense	6,574		6,369
Net income	$	13,998	13,247
Net income per share:
Basic	$	1.02	0.98
Diluted	$	0.99	0.95
Average common shares:
Basic	13,759,898		13,468,824
Diluted	14,152,961		13,952,431

See accompanying notes to unaudited condensed consolidated financial statements.

4

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2004 and 2003

(In thousands)

	2004			2003
Operating activities:
Net income	$	13,998		13,247
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,490			1,900
Depreciation, amortization and accretion, net	2,330			2,134
Gains on sales of mortgage loans held for sale	(845		)	(2,175	)
Origination of mortgage loans held for sale	(157,720		)	(205,531	)
Proceeds from sale of mortgage loans held for sale	158,604			224,357
Gains on sales of securities available for sale	—			(10	)
Loss on the sale of premises and equipment	4			—
Loss on the sale of other real estate	62			24
Income tax benefit of stock options exercised	660			335
Increase in accrued interest receivable and other assets	(22,329		)	(9,773	)
(Decrease) increase in accrued interest payable and other liabilities	(2,644		)	1,908
Net cash (used) provided by operating activities	(6,390		)	26,416
Investing activities:
Net (increase) decrease in federal funds sold	(7,665		)	4,496
Purchases of securities available for sale	(91,827		)	(105,911	)
Proceeds from sales of securities available for sale	—			1,014
Proceeds from maturities of securities available for sale	89,358			49,539
Proceeds from maturities of securities held to maturity	524			3,284
Net increase in loans	(46,594		)	(39,746	)
Purchases of premises and equipment	(3,868		)	(4,708	)
Proceeds from sales of other real estate	1,147			976
Net cash used by investing activities	(58,925		)	(91,056	)
Financing activities:
Net increase in deposits	40,151			33,563
Net (decrease) increase in securities sold under agreements to repurchase and federal funds purchased	(6,707		)	29,978
Net increase (decrease) in other short-term borrowings	54			(652	)
Proceeds of Federal Home Loan Bank advances	30,000			—
Repayments of subordinated debentures	(30		)	(30	)
Issuance of common stock for options exercised, dividend reinvestment plan and employee benefit plans	2,774			921
Common stock repurchases	(228		)	(41	)
Cash dividends paid	(3,564		)	(2,901	)
Net cash provided by financing activities	62,450			60,838
Net increase (decrease) in cash and cash equivalents	(2,865		)	(3,802	)
Cash and cash equivalents at beginning of period	31,911			34,918
Cash and cash equivalents at end of period	$	29,046		31,116
Supplemental cash flow information:
Income tax payments	$	5,590		5,550
Cash paid for interest	$	11,661		13,244

See accompanying notes to unaudited condensed consolidated financial statements.

5

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2004

(In thousands, except share and per share data)

						Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Common Stock
	Number of Shares		Amount
Balance December 31, 2003	13,575,316		$	6,128		$	16,153		$	76,659		$	1,474		$	100,414
Net income	—		—			—			13,998			—			13,998
Change in other comprehensive income (loss), net of tax	—		—			—			—			(242		)	(242		)
Shares issued for stock options exercised, dividend reinvestment plan and employee benefit plans	318,076		1,074			2,360			—			—			3,434
Cash dividends, $0.28 per share	—		—			—			(3,866		)	—			(3,866		)
Shares repurchased	(10,600	)	(50		)	(178		)	—			—			(228		)
Balance September 30, 2004	13,882,792		$	7,152		$	18,335		$	86,791		$	1,232		$	113,510

See accompanying notes to unaudited condensed consolidated financial statements.

6

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Comprehensive Income

For the three months ended September 30, 2004 and 2003

(In thousands)

	2004		2003
Net income	$	4,971	4,981
Other comprehensive income, net of tax:
Change in unrealized holding gains (losses) on securities available for sale arising during the period	2,059		(907	)
Less reclassification adjustment for gains included in net income	—		7
Other comprehensive income (loss)	2,059		(900	)
Comprehensive income	$	7,030	4,081

See accompanying notes to unaudited condensed consolidated financial statements.

7

S.Y. BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Comprehensive Income

For the nine months ended September 30, 2004 and 2003

(In thousands)

	2004			2003
Net income	$	13,998		13,247
Other comprehensive income, net of tax:
Change in unrealized holding losses on securities available for sale arising during the period	(242		)	(482	)
Less reclassification adjustment for gains included in net income	—			7
Other comprehensive loss	(242		)	(475	)
Comprehensive income	$	13,756		12,772

See accompanying notes to unaudited condensed consolidated financial statements.

8

S.Y. BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

(1)Summary of Significant Accounting Policies

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

The unaudited consolidated 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 (Trust), a Delaware statutory business trust that is a 100% owned finance subsidiary.  Due to a recent accounting pronouncement, the Trust is no longer consolidated in the consolidated financial statements of Bancorp.  See note 4 to the consolidated 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, 2003 included in S.Y. Bancorp, Inc.’s Annual Report on Form 10-K.

Interim results for the three and nine month periods ended September 30, 2004 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.  The accounting policy related to the allowance for loan losses is applicable to the commercial and retail banking segment of Bancorp.

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 will continue 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 proforma net income and earnings per share in the notes to its consolidated 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.

9

Bancorp’s as reported and proforma earnings per share information for the three months ended September 30 follows:

	Three Months Ended September 30
(In thousands, except per share data)	2004		2003
Net income, as reported	$	4,971	$	4,981
Less: stock-based compensation expense determined under fair value method, net of tax	67		54
Proforma net income	$	4,904	$	4,927
Basic EPS:
As reported	$	0.36	$	0.37
Proforma	0.35		0.36
Diluted EPS:
As reported	0.35		0.36
Proforma	0.35		0.35

Bancorp’s as reported and proforma earnings per share information for the nine months ended September 30 follows:

	Nine Months Ended September 30
(In thousands, except per share data)	2004		2003
Net income, as reported	$	13,998	$	13,247
Less: stock-based compensation expense determined under fair value method, net of tax	199		163
Proforma net income	$	13,799	$	13,084
Basic EPS:
As reported	$	1.02	$	0.98
Proforma	1.00		0.97
Diluted EPS:
As reported	0.99		0.95
Proforma	0.97		0.94

10

Option grant activity for the first three quarters of 2004 and 2003 is summarized as follows.  All options were granted at a strike price equal to the market value of Bancorp’s common stock at the time of grant and are subject to a vesting schedule of 20% per year.  Options were granted in the second quarter of 2004 to acquire 9,000 shares of common stock at an average strike price of $21.40.  The average fair value of each of these options was $4.98.  Options were also granted in the third quarter of 2003 to acquire 2,000 shares of common stock at a strike price of $18.95.  The fair value of each of these options was $4.16.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used:

	2004		2003
Assumptions Used in Option Valuation
Dividend yield	1.59	%	1.53	%
Expected volatility	17.25	%	16.81	%
Risk free interest rate	4.25	%	3.78	%
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 nine months ended September 30 follows:

(In thousands)	2004				2003
Beginning balance	$		11,798		11,705
Provision for loan losses	1,490				1,900
Loans charged off	(1,334			)	(2,843	)
Recoveries	529				603
Ending balance	$	12,483			11,365

(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 borrowed $30,000,000 via three separate fixed rate, non-callable advances of $10,000,000 each in the first quarter of 2004.  The advances have terms of one, two and three years, respectively, with a weighted average rate of 2.14%.  Interest payments are due monthly, with principal due at maturity.

(4)Subordinated Debentures

On June 1, 2001, S.Y. Bancorp Capital Trust I (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 S.Y. Bancorp Capital Trust I is a $20.0 million subordinated debenture of Bancorp.  The subordinated debenture bears interest at the rate of 9.00% and matures

11

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 September 30, 2004 and December 31, 2003 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 $180,000 at September 30, 2004 and $210,000 at December 31, 2003. 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 2004, the rate on these debentures was 3.00% and for 2003 the rate was 3.25%. 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.  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.

12

(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 September 30,
(Dollars in thousands)	2004		2003
Components of net periodic benefit cost:
Service cost	$	—	$	—
Interest cost	30		30
Expected return on plan assets	—		—
Amortization of prior service cost	1		2
Amortization of the net (gain) loss	8		5
Net periodic benefit cost	$	39	$	37

	Nine Months Ended September 30,
(Dollars in thousands)	2004		2003
Components of net periodic benefit cost:
Service cost	$	—	$	—
Interest cost	90		90
Expected return on plan assets	—		—
Amortization of prior service cost	4		5
Amortization of the net (gain) loss	24		16
Net periodic benefit cost	$	118	$	111

(7)Commitments to Extend Credit

As of September 30, 2004, 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 consolidated financial statements. In management’s opinion, commitments to extend credit of $248,690,000, including standby letters of credit of $14,221,000, represent normal banking transactions, and no significant losses are anticipated to result from these commitments as of September 30, 2004.  Commitments to extend credit were $198,907,000, including letters of credit of $11,854,000, as of December 31, 2003.  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

13

commitments and conditional guarantees as for on-balance sheet instruments.  At September 30, 2004, no amounts have been accrued in the consolidated 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 September 30, 2004.

(9)Net Income Per Share

The following table reflects, for the three and nine month periods ended September 30, 2004 and 2003, 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 September 30			Nine Months Ended September 30
	2004		2003	2004	2003
Net income, basic and diluted	$	4,971	4,981	13,998	13,247
Average shares outstanding	13,843		13,500	13,760	13,468
Effect of dilutive securities	349		473	393	484
Average shares outstanding including dilutive securities	14,192		13,973	14,153	13,952
Net income per share, basic	$	0.36	0.37	1.02	0.98
Net income per share, diluted	$	0.35	0.36	0.99	0.95

14

(10)Segments

The Bank’s, and thus Bancorp’s, principal activities include commercial and retail banking, investment management and trust, and mortgage banking.  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. Mortgage banking originates residential loans and sells them, servicing released, in the secondary market.

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 and nine months ended September 30, 2004 and 2003 follows:

	Three Months Ended September 30				Nine Months Ended September 30
(In thousands)	2004			2003	2004	2003
Net interest income:
Commercial and retail banking	$	10,694		10,459	32,101	30,472
Investment management and trust	131			268	519	774
Mortgage banking	103			203	299	582
Total	$	10,928		10,930	32,919	31,828
Non-interest income:
Commercial and retail banking	$	3,149		2,756	8,904	7,893
Investment management and trust	2,732			2,443	8,298	7,069
Mortgage banking	354			1,093	1,273	3,130
Total	$	6,235		6,292	18,475	18,092
Net income:
Commercial and retail banking	$	4,031		3,748	11,345	9,809
Investment management and trust	942			823	2,572	2,329
Mortgage banking	(2		)	410	81	1,109
Total	$	4,971		4,981	13,998	13,247

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

15

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 and nine month periods ended September 30, 2004 and compares those periods with the same periods 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 nine months of 2004 compared to December 31, 2003.  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 market 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 2004 through September 30

The first nine months of 2004 proved the value of our Company’s diverse revenue stream and our focus on expense control.  As business loan growth during the period was below our historic rates and our mortgage banking business struggled with the rise in mortgage rates, Bancorp was able to show solid growth in other areas such as investment management and trust, brokerage and service charges on deposit accounts.  These factors helped Bancorp complete the first three quarters of the year with net income exceeding the comparable period of 2003 by 5.7%.

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 three quarters of 2004 increased 3.4% as compared to the prior year due to a reduction in interest expense.

Slower than desired business loan growth was an important factor in the results for the first nine months of 2004.  It appears many customers have generally maintained a cautious stance toward new borrowings, which, together with increased competitive conditions, restrained loan growth.  Despite slow loan volume during most of 2004, loan growth in the third quarter of 2004 represented the Company’s best quarter-to-quarter increase since 2001.  The trend seen over the last quarter provides a hopeful sign that customers are becoming more confident about their future plans.  To help fund expected loan growth, Company management pursued low cost funding via borrowings from the Federal Home Loan Bank during the first quarter of 2004.  These borrowings were a more economic funding alternative than higher cost certificates of deposit.  During the third quarter of 2004, Management pursued certificates of deposit more actively than during the first half of the year.

16

As compared to peers, Bancorp has a higher than average proportion of non-interest revenues which, in addition to net interest income, has helped to fuel net income growth. While total non-interest income grew only 2.1% in the first nine months of 2004 as compared to the same period of 2003, increasing fees from investment management and trust fees, service charges on deposit accounts and brokerage revenues offset sharp declines in gains on sales of mortgage loans.

Bancorp continues to expand its footprint and look for complementary opportunities in new markets.  During the second quarter of 2004, Bancorp opened its first branch location in Indianapolis.  In the third quarter Bancorp followed that branch opening with an investment in Indiana Business Bank (IBB), an Indianapolis based, state chartered de novo bank.  Bancorp’s investment of $1.4 million represents less than 10% ownership in IBB.  Bancorp and IBB expect to enter into participation agreements for loans that exceed IBB’s lending limits or internal policies.  We believe these steps will augment our long-term strategy of building a larger market position in the Indianapolis area.

Results in 2004 were positively affected by a lower provision for loan losses.  Bancorp’s process of evaluating the credit risk inherent in the loan portfolio considered data including non-performing loans, past due loans, charge offs, internal watch lists, the nature of our loan portfolio and economic data.  Net charge-offs were relatively small in the first nine months of 2004.  The third quarter of 2004 was the fifth consecutive quarter that net charge-offs represented three basis points or less of average loans outstanding.  This compares favorably with an average quarterly ratio of net charge-offs to average loans of approximately 12 basis points for the five previous quarters.  Non-performing loans, while down slightly from the prior year, were up from the second quarter of 2004.  Taking into consideration all relevant data, management considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio at September 30, 2004.

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

(a)Results Of Operations

Net income of $4,971,000 for the three months ended September 30, 2004 decreased $10,000 or 0.2% from $4,981,000 for the comparable 2003 period.  Basic net income per share was $0.36 for the third quarter of 2004, a decrease of 2.7% from the $0.37 for the same period in 2003.  Net income per share on a diluted basis was $0.35 for the third quarter of 2004 compared to $0.36 for the third quarter of 2003; a 2.8% decrease.  Annualized return on average assets and annualized return on average stockholders’ equity were 1.71% and 17.90%, respectively, for the third quarter of 2004, compared to 1.78% and 20.76%, respectively, for the same period in 2003.

Net income of $13,998,000 for the nine months ended September 30, 2004 increased $751,000 or 5.7% from $13,247,000 for the comparable 2003 period.  Basic net income per share was $1.02 for the first nine months of 2004, an increase of 4.1% from the $0.98 for the same period in 2003. Net income per share on a diluted basis was $0.99 for the first nine months of 2004 compared to $0.95 for the first nine months of 2003.  This represents a 4.2% increase.  Annualized return on average assets and annualized return on average stockholders’ equity were 1.65% and 17.44%, respectively, for the first nine months of 2004, compared to 1.65% and 19.25%, respectively, for the same period in 2003.

17

Net Interest Income

The following tables present the average balance sheets for the three and nine month periods ended September 30, 2004 and 2003 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 September 30, 2004							For the three months ended September 30, 2003
(Dollars in thousands)	Average Balances			Interest		Average Rate		Average Balances		Interest		Average Rate
Earning assets
Federal funds sold	$		26,521	$	87	1.31	%	$	35,088	$	90	1.02	%
Mortgage loans held for sale	4,003			53		5.27	%	19,490		250		5.09	%
Securities
Taxable	104,452			983		3.74	%	102,467		951		3.68	%
Tax-exempt	37,595			511		5.41	%	26,044		398		6.06	%
Loans, net of unearned income	906,833			13,706		6.01	%	859,540		13,601		6.28	%
Total earning assets	1,079,404			15,340		5.65	%	1,042,629		15,290		5.82	%
Less allowance for loan losses	12,947							11,800
	1,066,457							1,030,829
Non-earning assets
Cash and due from banks	32,178							33,460
Premises and equipment	26,210							24,676
Accrued interest receivable and other assets	32,527							20,860
Total assets	$	1,157,372						$	1,109,825

18

	For the three months ended September 30, 2004							For the three months ended September 30, 2003
(Dollars in thousands)	Average Balances		Interest			Average Rate		Average Balances		Interest				Average Rate
Interest bearing liabilities
Deposits
Interest bearing demand deposits	$	268,959	$		603	0.89	%	$	262,809		$		514		0.78		%
Savings deposits	49,479		49			0.39	%	42,347		11				0.10		%
Money market deposits	111,073		282			1.01	%	110,520		127				0.46		%
Time deposits	316,577		2,392			3.01	%	342,506		2,912				3.37		%
Securities sold under agreements to repurchase and federal funds purchased	74,517		239			1.28	%	66,318		146				0.87		%
Other short-term borrowings	595		2			1.34	%	1,535		3				0.78		%
Long-term debt	50,799		626			4.90	%	20,829		466				8.88		%
Total interest bearing liabilities	871,999		4,193			1.91	%	846,864		4,179				1.96		%
Non-interest bearing liabilities
Non-interest bearing demand deposits	157,085							149,628
Accrued interest payable and other liabilities	17,829							18,155
Total liabilities	1,046,913							1,014,647
Stockholders’ equity	110,459							95,178
Total liabilities and stockholders’ equity	$	1,157,372						$	1,109,825
Net interest income			$	11,147						$		11,111
Net interest spread						3.74	%							3.86		%
Net interest margin						4.11	%							4.23		%

19

	For the nine months ended September 30, 2004							For the nine months ended September 30, 2003
(Dollars in thousands)	Average Balances			Interest		Average Rate		Average Balances			Interest		Average Rate
Earning assets
Federal funds sold	$		18,446	$	155	1.12	%	$	35,174		$	298	1.13	%
Mortgage loans held for sale	4,016			162		5.39	%	15,830			650		5.49	%
Securities
Taxable	105,579			3,026		3.83	%	91,499			2,759		4.03	%
Tax-exempt	37,922			1,536		5.41	%	24,554			1,143		6.22	%
Loans, net of unearned income	897,895			40,418		6.01	%	846,905			40,821		6.44	%
Total earning assets	1,063,858			45,297		5.69	%	1,013,962			45,671		6.02	%
Less allowance for loan losses	12,544							12,029
	1,051,314							1,001,933
Non-earning assets
Cash and due from banks	31,923							30,160
Premises and equipment	25,198							23,561
Accrued interest receivable and other assets	24,580							19,007
Total assets	$	1,133,015						$		1,074,661

20

	For the nine months ended September 30, 2004						For the nine months ended September 30, 2003
(Dollars in thousands)	Average Balances		Interest		Average Rate		Average Balances		Interest			Average Rate
Interest bearing liabilities
Deposits
Interest bearing demand deposits	$	274,140	$	1,661	0.81	%	$	249,396	$		1,713	0.92	%
Savings deposits	47,293		85		0.24	%	40,636		59			0.19	%
Money market deposits	105,351		516		0.65	%	107,600		502			0.62	%
Time deposits	307,567		7,073		3.07	%	349,405		9,163			3.51	%
Securities sold under agreements to repurchase and federal funds purchased	74,396		609		1.09	%	58,884		474			1.08	%
Other short-term borrowings	1,083		6		0.74	%	1,030		6			0.78	%
Long-term debt	44,887		1,780		5.30	%	20,829		1,398			8.97	%
Total interest bearing liabilities	854,717		11,730		1.83	%	827,780		13,315			2.15	%
Non-interest bearing liabilities
Non-interest bearing demand deposits	152,162						137,765
Accrued interest payable and other liabilities	18,889						17,109
Total liabilities	1,025,768						982,654
Stockholders’ equity	107,247						92,007
Total liabilities and stockholders’ equity	$	1,133,015					$	1,074,661
Net interest income			$	33,567					$	32,356
Net interest spread					3.86	%						3.87	%
Net interest margin					4.21	%						4.27	%

21

Notes to the average balance and interest rate tables:

(1)Net interest income, the most significant component of the Bank’s earnings, is total interest income less total interest expense.  The level of net interest income is determined by the mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.

(2)Net interest spread is the difference between the taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.

(3)Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets.  Net interest margin is affected by both the interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity.

(4)Interest income on a fully tax equivalent basis includes the additional amount of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income.  Interest income on municipal securities and loans have been calculated on a fully tax equivalent basis using a federal income tax rate of 35%.  The approximate tax equivalent adjustments to interest income were $219,000 and $181,000, respectively, for the three month periods ended September 30, 2004 and 2003 and $648,000 and $528,000, respectively, for the nine month periods end September 30, 2004 and 2003.

Fully taxable equivalent net interest income of $11,147,000 for the three months ended September 30, 2004 increased $36,000 or 0.3% from $11,111,000 when compared to the same period last year.  Net interest spread and net interest margin were 3.74% and 4.11%, respectively, for the third quarter of 2004 and 3.86% and 4.23%, respectively, for the third quarter of 2003.  Fully taxable equivalent net interest income of $33,567,000 for the nine months ended September 30, 2004 increased $1,211,000 or 3.7% from the same period last year.  Net interest spread and net interest margin were 3.86% and 4.21%, respectively, for the first nine months of 2004 and 3.87% and 4.27%, respectively, for the first nine months of 2003.  Net interest margin and spread were down for both the three and nine month periods ended September 30, 2004 when compared to the prior year.  Falling rates on interest earning assets have exceeded declines in rates on interest bearing liabilities.  Although Management believes Bancorp is well positioned for a rising interest rate environment, the increase in rates by the Federal Reserve during the quarter may not have a beneficial impact on the margin going forward as the positive effect of asset repricing may be offset by increased competitive pressure in loan and deposit pricing.  Depending on expected asset repricing and such factors as competitive rate pressures or unforeseen changes in Bancorp’s funding mix, the net interest margin could experience some slight contraction during the next quarter.

Average earning assets increased $49,896,000, or 4.9% to $1,063,858,000 for the first nine months of 2004 compared to 2003, reflecting growth in the loan and investment portfolios.  Average interest bearing liabilities increased $26,937,000 or 3.3% to $854,717,000 for the first nine months of 2004 compared to 2003 primarily due to increases in interest bearing transaction deposits, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank which were offset somewhat by a net decline in time deposits.

22

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.  Bank 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.

Bancorp uses an earnings simulation model to estimate and evaluate the impact of changing interest rates on earnings. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments in a one year forecast. 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 September 30, 2004 simulation analysis indicates that an increase in interest rates would have a positive effect on net interest income, and a decrease in interest rates would have a negative effect on net interest income.  These estimates are summarized below.

Interest Rate Simulation Sensitivity Analysis

	Net Interest Income Change
Increase 200bp	12.13	%
Increase 100bp	6.05
Decrease 100bp	(6.07	)
Decrease 200bp	(12.46	)

23

Provision for Loan Losses

The allowance for loan losses is based on management’s continuing review of individual credits, 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:

	Nine Months Ended September 30
(Dollars in thousands)	2004			2003
Balance at the beginning of the period	$	11,798		11,705
Provision for loan losses	1,490			1,900
Loan charge-offs, net of recoveries	(805		)	(2,240	)
Balance at the end of the period	$	12,483		11,365
Average loans, net of unearned income	$	897,895		846,905
Provision for loan losses to average loans (1)	0.17		%	0.22	%
Net loan charge-offs to average loans (1)	0.09		%	0.26	%
Allowance for loan losses to average loans	1.39		%	1.34	%
Allowance for loan losses to period-end loans	1.34		%	1.32	%

(1) Amounts not annualized

The provision for loan losses declined 21.6% during the first nine months of 2004 as compared to 2003 in consideration of several factors, all of which estimate the level of inherent risk in the loan portfolio.  Some of the measures used to determine the credit quality of the Bank’s loan portfolio showed overall improvement during the first nine months of 2004, such as net charge-offs.  Non-performing loans showed slight improvement from the same period one year ago.  Other asset quality measurements and internal loan review analysis indicate an overall positive view of the Bank’s asset quality.  Based on a review of all available information, Management considers the allowance for loan losses adequate to cover losses inherent in the loan portfolio.

24

Non-interest Income and Expenses

The following table sets forth the major components of non-interest income and expenses for the three and nine month periods ended September 30, 2004 and 2003.

	Three Months Ended September 30			Nine Months Ended September 30
(In thousands)	2004		2003	2004	2003
Non-interest income:
Investment management and trust services	$	2,361	2,071	7,017	6,156
Service charges on deposit accounts	2,323		2,205	6,761	6,184
Bankcard transaction revenue	337		246	895	781
Gains on sales of mortgage loans held for sale	235		739	845	2,175
Gains on sales of securities available for sale	—		10	—	10
Brokerage commissions and fees	371		372	1,281	913
Other	608		649	1,676	1,873
Total non-interest income	$	6,235	6,292	18,475	18,092
Non-interest expenses:
Salaries and employee benefits	5,236		5,504	16,603	16,154
Net occupancy expense	803		677	2,190	1,910
Data processing expense	870		794	2,545	2,550
Furniture and equipment expense	314		273	872	753
State bank taxes	306		270	883	818
Other	2,173		2,005	6,239	6,219
Total non-interest expenses	$	9,702	9,523	29,332	28,404

Total non-interest income decreased $57,000 or 0.9% for the third quarter of 2004, and increased $383,000, or 2.1% for the first nine months of 2004 compared to the same periods in 2003.

Investment management and trust services income increased $290,000 or 14.0% in the third quarter of 2004, as compared to the same period in 2003.  For the first nine months of 2004, investment management and trust services income increased $861,000 or 14.0% compared to 2003.  Trust assets under management at September 30, 2004 were $1.26 billion, compared to $1.22 billion at December 31, 2003 and $1.14 billion at September 30, 2003.  Trust assets are expressed in terms of market value.  Assets under management are affected directly by the performance of the equity and bond markets and were positively impacted by the performance that was seen in the second half of 2003 and the first part of 2004.  Also, the addition of new accounts continues to help grow assets under management.

Service charges on deposit accounts increased $118,000 or 5.4% in the third quarter of 2004 and $577,000 or 9.3% for the first nine months of 2004 as compared to the same periods in 2003. Growth in service charges on deposit accounts is primarily due to increased account volumes and an increase in the overall fee schedule for deposit accounts as compared to the prior year.

Bankcard transaction revenue increased $91,000 or 37.0% in the third quarter of 2004 and $114,000 or 14.6% for the first nine months of 2004 as compared to the same periods in 2003.  This source of revenue should continue to increase as more and more customers utilize this convenient payment source.

25

Gains on sales of mortgage loans were $235,000 in the third quarter of 2004 and $739,000 in 2003.  This represents a decline of 68.2%.  For the nine months ended September 30, 2004 gains on the sale of mortgage loans were $845,000 compared to $2,175,000 in 2003.  This is a decline of 61.2%.  The Bank operates a mortgage banking division which originates residential mortgage loans and sells the loans in the secondary market.  Increases in long term interest rates led to a much lower level of activity beginning in the fourth quarter of 2003 and continuing during the first three quarters of 2004.  For the first three quarters of 2003, long term interest rates were near historic lows and led to a high level of refinancing activity.

Brokerage commissions and fees decreased $1,000 or 0.3% in the third quarter of 2004 and increased $368,000 or 40.3% for the first nine months of 2004 as compared to the same periods in 2003. Improved performance of the overall equity markets for the first part of 2004 allowed the brokerage department to report stronger results.

Other non-interest income decreased $41,000 or 6.3% in the third quarter of 2004 and $197,000 or 10.5% for the first nine months of 2004 as compared to 2003.  Numerous factors contributed to this decrease, but it was primarily the result of various fee income related to the mortgage banking division’s decreased volume.  An offsetting factor to the decline in mortgage related income was income from bank-owned life insurance.  The Bank purchased two $10 million policies during the third quarter of 2004.  Income related to bank-owned life insurance was $122,000 for the third quarter and year to date periods ended September 30, 2004.

Total non-interest expenses increased $179,000 or 1.9% for the third quarter of 2004 and $928,000 or 3.3% for the first nine months of 2004 as compared to the same periods in 2003.  Salaries and employee benefits decreased $268,000, or 4.9%, for the third quarter of 2004 and increased $449,000 or 2.8% for the first three quarters of 2004 compared to 2003.  The decrease in the third quarter was primarily the effect of better-than-expected claims experience in the Company’s self-funded health care plan.  The increase for the first nine months of the year arose in part from regular salary increases, as well as new employees added to support the Bank’s growth.  The Bank had 412 full time equivalent employees as of September 30, 2004 and 386 full time equivalents as of September 30, 2003.  Net occupancy expense increased $126,000 or 18.6% in the third quarter of 2004 and $280,000 or 14.7% for the first nine months of 2004 as compared to 2003. The increases are largely a result of the opening of new branch facilities.  The remodeling of some existing office space also contributed to the increase.  Data processing expense increased $76,000 or 9.6% for the third quarter of 2004 and decreased $5,000 or 0.2% for the first nine months of 2004 compared to 2003.  The increase for the quarter can be attributed to increased maintenance costs compared to the prior year, while the decline for the year can be attributed to lower software costs in our trust department along with lower ATM network costs.  Furniture and equipment expense increased $41,000 or 15.0% for the third quarter of 2004 and $119,000 or 15.8% for the first nine months of 2004 compared to 2003.  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 and the renovation of some existing facilities.  State bank taxes were up $36,000 or 13.3% for the third quarter of 2004 and $65,000 or 8.0% for the first three quarters of 2004 compared to 2003.  State bank taxes are based on capital levels and increase as capital levels increase.  Other non-interest expenses increased $168,000 or 8.4% in the third quarter of 2004 and $20,000 or 0.3% for the first nine months of 2004 as compared to 2003.  The slight increase in other non-interest expenses for the nine month period is primarily related to a variety of factors including increased operating expenses related to communications, general insurance, and losses on fraudulent activity offset by an overall decline in mortgage banking related expenses.

Income Taxes

Bancorp had income tax expense of $6,574,000 for the first nine months of 2004, compared to $6,369,000 for the same period in 2003.  The effective rate for each nine month period was 32.0% in 2004 and 32.5% in 2003.

26

In the third quarter of 2004, Bancorp had income tax expense of $2,310,000 compared to $2,418,000 for the same period in 2003.  The effective rate for each three-month period was 31.7% in 2004 and 32.7% in 2003.

(b)Financial Condition

Balance Sheet

Total assets increased $74,222,000 or 6.6% from $1.118 billion on December 31, 2003 to $1.193 billion on September 30, 2004.  Average assets for the first nine months of 2004 were $1.133 billion.  Total assets at September 30, 2004 increased $76,591,000 from September 30, 2003, representing a 6.9% increase.  Total liabilities increased $61,126,000 or 6.0% from $1.018 billion on December 31, 2003 to $1.079 billion on September 30, 2004.  Average liabilities for the first nine months of 2004 were $1.026 billion.  Total liabilities at September 30, 2004 increased $60,090,000 from September 30, 2003, representing a 5.9% increase.

Since year end, loans have increased approximately $46,659,000.  This growth was funded primarily through the $30,000,000 increase in Federal Home Loan Bank (FHLB) advances during the first quarter of 2004 and growth in deposits.  The fixed rate advances from the FHLB are all non-callable, bullet maturities of three years or less and were used to replace higher priced certificates of deposit.  Management considers these advances from the FHLB an attractive alternative to higher priced certificates of deposit.  Other assets also increased by approximately $20,000,000 due to the purchase of two $10 million policies of bank-owned life insurance during the third quarter of 2004.  These policies are whole life policies to which the Bank is the primary beneficiary.

Non-performing Loans and Assets

Non-performing loans, which included non-accrual loans of $3,991,000 and loans past due over 90 days and still accruing of $982,000, totaled $4,973,000 at September 30, 2004.  Non-performing loans were $4,850,000 at December 31, 2003. This represents 0.53% of total loans at September 30, 2004 compared to 0.55% at December 31, 2003.

Non-performing assets, which include non-performing loans, other real estate and repossessed assets, if any, totaled $8,342,000 at September 30, 2004 and $8,483,000 at December 31, 2003.  This represents 0.70% of total assets at September 30, 2004 compared to 0.76% at December 31, 2003.

(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.

27

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.  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 $73 million.

Bancorp’s liquidity depends primarily on the dividends paid to it as the sole shareholder of the Bank.  At September 30, 2004, the Bank may pay up to $37,735,000 in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.  During the first nine months of 2004 the Bank paid dividends to Bancorp totaling $5,218,000.

(d)Capital Resources

At September 30, 2004, stockholders’ equity totaled $113,510,000, an increase of $13,096,000 since December 31, 2003.  Accumulated other comprehensive income which for Bancorp consists of net unrealized gains on securities available for sale and a minimum pension liability adjustment, both of which are net of taxes, was $1,232,000 at September 30, 2004 and $1,474,000 at December 31, 2003.  The change since year end is a reflection of the effect of rising interest rates on the valuation of the Bank’s portfolio of securities available for sale.

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.

At September 30, 2004, Bancorp’s tier 1 capital, total risk based capital and leverage ratios were 13.76%, 15.03%, and 11.34% respectively, compared to 13.57%, 14.84% and 10.31%, respectively, in the same period for 2003.  These ratios exceed the minimum required by regulators to be well capitalized.

 (e)Recently Issued Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46R) which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity.  FIN 46R is intended to achieve more consistent application of consolidation policies to variable interest entities and, thus improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities.  Including the assets, liabilities, and results of activities of variable interest entities in the consolidated financial

28

statements of their primary beneficiaries should provide more complete information about the resources, obligations, risks and opportunities of the consolidated enterprise.  For public companies, FIN 46R is applicable to all special-purpose entities (SPEs) no later than the end of the first reporting period ending after December 15, 2003 (i.e., December 31, 2003 for Bancorp), and immediately to all entities created after January 31, 2003.  The effective dates of FIN 46R vary depending on the type reporting enterprise and the type of entity that the enterprise is involved with.  FIN 46R permits either a cumulative effect adjustment or full restatement for all periods presented upon adoption of FIN 46R.  Bancorp has chosen a full restatement for its consolidated financial statements.

The only SPE that Bancorp has in place is a limited purpose trust that issues trust preferred securities.  This limited purpose trust issued preferred securities to outside investors and used the proceeds of the issuance to purchase, from Bancorp, an equivalent amount of junior subordinated debentures having stated maturities.  The debentures are the only assets of the limited purpose trust.  When Bancorp makes its payments of interest on the debentures, the limited purpose trust distributes cash to holders of the trust preferred securities.  The trust preferred securities must be redeemed upon maturity of the debentures.  Prior to FIN 46R, Bancorp consolidated the limited purpose trust as a result of holding all the common equity of the limited purpose trust.  Under the requirements of FIN 46R, Bancorp must deconsolidate the limited purpose trust.  This has been reflected in Bancorp’s consolidated financial statements.

In December 2003, FASB issued SFAS No. 132 (revised), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.”  SFAS No. 132 (revised) prescribes employers’ disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or recognition of those plans.  SFAS No. 132 (revised) retains and revises the disclosure requirements contained in the original SFAS No. 132.  It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans.  SFAS No. 132 (revised) is generally effective for fiscal years ending after December 15, 2003.  Bancorp’s disclosures in Note 6 to the consolidated financial statements incorporate the requirements of SFAS No. 132 (revised).

In March of 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 105, “Application of Accounting Principles to Loan Commitments,” (SAB 105) which provides guidance regarding loan commitments accounted for as derivative instruments under FASB Statement No. 133.  SAB 105 specifically addresses commitments to sell loans after funding and the fact that the commitment should be accounted for as a derivative instrument and measured at fair value.  SAB 105 is required to be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004.  The adoption of SAB 105 currently does not, and is not expected to have, a material impact on Bancorp’s consolidated financial statements.

29

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 Officer, President and Chief Financial Officer 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.  There has been no change in internal controls over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect those controls.

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 September 30, 2004.

	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Number of Shares that May Yet Be Purchased Under the Plan
July 1 - July 31	6,100	$	20.02	6,100	164,858
Aug 1 - Aug 31	—	—		—	164,858
Sept 1 - Sept 30	—	—		—	164,858
Total	6,100	$	20.02	6,100	164,858

The board of directors of S.Y. Bancorp, Inc. approved a 400,000 share buyback plan in 1999.  The plan has no expiration date.

30

Item 6.Exhibits

The following exhibits are filed or furnished as a part of this report:

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		S.Y. BANCORP, INC.
Date:	November 5, 2004	By:	/s/ David H. Brooks
			David H. Brooks, Chairman
			and Chief Executive Officer
Date:	November 5, 2004	By:	/s/ David P. Heintzman
			David P. Heintzman, President
Date:	November 5, 2004	By:	/s/ Nancy B. Davis
			Nancy B. Davis, Executive Vice
			President, Treasurer and Chief
			Financial Officer

31