Financial Section Roadmap

The financial section of this Form 10-K includes management's discussion and analysis, consolidated financial statements, and the notes to those financial statements. Bancorp has prepared the following summary, or "roadmap," to assist in your review of the financial section. It is designed to give you an overview of S.Y. Bancorp, Inc. and summarize some of the more important activities and events that occurred during 2012.

Our Business

S.Y. Bancorp, Inc. (Bancorp), incorporated in 1988, has no active business operations. Thus, Bancorp's business is substantially the same as that of its wholly owned subsidiary, Stock Yards Bank & Trust Company (the Bank). The Bank has operated continuously since it opened in 1904. The Bank conducted business at one location for 85 years and began branching in 1989. At December 31, 2012, the Bank had 25 full service banking locations in the Louisville MSA, three full service banking locations in the Indianapolis MSA, and three full service banking locations in the Cincinnati MSA. The Bank's focus on flexible, attentive customer service has been key to its growth and profitability. The wide range of services added by investment management and trust, securities brokerage, and mortgage origination helps support the corporate philosophy of capitalizing on full service customer relationships.

In the first quarter of 2013, Bancorp announced plans to close one branch location in the Louisville MSA. This branch will continue to operate as a full service branch until its closing in the second quarter of 2013.

In the fourth quarter of 2012, Bancorp announced it had entered into an agreement to merge with The Bancorp, Inc., parent company of THE BANK -Oldham County, Inc. The merger is subject to regulatory approvals and the approval of shareholders of The Bancorp, Inc., and is expected to close early in the second quarter of 2013.

Financial Section Overview

The financial section includes the following:

Management's discussion and analysis, or MD&A (pages 13 through 41) - provides information as to the analysis of the consolidated financial condition and results of operations of Bancorp. It contains management's view about industry trends, risks, uncertainties, accounting policies that Bancorp views as critical in light of its business, results of operations including discussion of the key performance drivers, financial position, cash flows, commitments and contingencies, important events, transactions that have occurred over the last three years, and forward-looking information, as appropriate.

Financial statements (pages 42 through 46) - include Consolidated Balance Sheets as of the end of the last two years, and Consolidated Statements of Income, Changes in Stockholders' Equity, Comprehensive Income, and Cash Flows for each of the last three years. Bancorp's financial statements are prepared in accordance with US GAAP.

Notes to the financial statements (pages 47 through 84) - provide insight into, and are an integral part of, the financial statements. The notes contain explanations of significant accounting policies, details about certain captions on the financial statements, information about significant events or transactions that have occurred, discussions about legal proceedings, commitments and contingencies, and selected financial information relating to business segments. The notes to the financial statements also are prepared in accordance with US GAAP.

Reports related to the financial statements and internal control over financial reporting (pages 85 through 89) - include the following:

† A report from KPMG LLP, an independent registered public accounting firm, which includes their opinion on the presentation of Bancorp's consolidated financial statements based on their audits;

† A report from management indicating Bancorp's responsibility for financial reporting and the financial statements;

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

† A report from KPMG LLP, which includes their opinion on the effectiveness of Bancorp's internal control over financial reporting.

Forward-Looking Statements

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

Critical Accounting Policies

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

Management has identified the accounting policy related to the allowance and provision for loan losses as critical to the understanding of Bancorp's results of operations and discussed this conclusion with the Audit Committee of the Board of Directors. Since the application of this policy requires significant management assumptions and estimates, it could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Assumptions include many factors such as changes in borrowers' financial condition which can change quickly or historical loss ratios related to certain loan portfolios which may or may not be indicative of future losses. To the extent that management's assumptions prove incorrect, the results from operations could be materially affected. The impact and any associated risks related to this policy on Bancorp's business operations are discussed in the "Allowance for Loan Losses" section below.

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

Overview of 2012

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

In 2012, Bancorp completed a year of asset and deposit growth with net income totaling $25,801,000, an increase of 9% over 2011, and the highest level ever achieved by Bancorp. Increased profitability was primarily due to a decline in interest expense, an increase in non-interest income and, partially offset by higher non-interest expenses and tax expense. Diluted earnings per share for 2012 increased 8% over 2011 to $1.85, also exceeding the highest amount recorded in any prior year.

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

Bancorp's loan portfolio increased 3% during 2012 to $1.6 billion. Record loan production due to increased calling efforts and loan demand was largely offset by higher than normal loan payoffs due to increased competition from banks and non-bank financial firms. Increased loan volume contributed to higher interest income in 2012, but the increase resulting from volume was partially offset by declining interest rates on loans and investments over the past year. As a result, interest income for 2012 increased $862,000 over 2011. Despite significant deposit growth, interest expense declined due to lower funding costs on deposits and borrowings. While rates paid on liabilities decreased, rates on earning assets decreased slightly more, resulting in a decreased net interest spread and net interest margin compared to 2011. Net interest margin in 2012 reflected a higher amount of prepayment fees associated with a surge in loan refinancing activity. Adjusting for these sources of additional income, Bancorp's more normalized or core net interest margin has trended downward throughout 2012, declining to 3.88% for 2012 from 4.01% for 2011. (See "Non-GAAP Financial Measures" on page 39 for reconcilement of non-GAAP measures to US GAAP measures.)

Total non-interest income in 2012 increased $5.2 million compared to 2011. Income from investment management and trust services, which constitutes an average of 40% of non-interest income, increased 3% for 2012 due to higher asset values and an expanding client base. The magnitude of its investment management and trust revenue distinguishes Bancorp from other similarly sized community banks. Trust assets under management rose to $1.96 billion at December 31, 2012, compared to $1.74 billion at December 31, 2011. While fees are based on market values, they typically do not fluctuate directly with the overall stock market. Accounts usually contain fixed income and equity asset classes, which generally react inversely to each other. Nonrecurring fees such as estate, financial planning, insurance, and some retirement fees are not affected by the fluctuations in the market. Gains on sales of mortgage loans increased $2.2 million, or 103.6%, in 2012 compared to 2011, as customers took advantage of historically low rates to refinance as well as purchase homes. In addition, Bancorp experienced increases in brokerage income, bankcard transaction income, and had income from Bancorp's investment in a domestic private investment fund, which it liquidated in 2012, compared to a loss in 2011.

Higher non-interest expenses for 2012 resulted from increases in salaries and benefits, occupancy, data processing expenses and other expenses, partially offset by decreases in losses on foreclosed assets and FDIC insurance expense. Bancorp's efficiency ratio for 2012 of 57.4% increased slightly from 56.5% in 2011.

Also affecting 2012 results, Bancorp's provision for loan losses decreased to $11,500,000 compared to $12,600,000 for 2011, in response to Bancorp's assessment of inherent risk in the loan portfolio. The provision for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysis of the risk in the loan portfolio. The provision results from an allowance methodology that is driven by risk ratings which reflects the impact on risk ratings resulting from the ongoing

economic stress on borrowers witnessed from 2008 through 2012. Bancorp's allowance for loan losses was 2.01% of total loans at December 31, 2012, compared with 1.93% of total loans at December 31, 2011.

Bancorp's effective tax rate increased to 27.2% in 2012 from 25.8% in 2011. The lower effective tax rate in 2011 was primarily due to a one-time adjustment of approximately $700,000 to Bancorp's deferred tax assets relating to tax-advantaged investments that Bancorp has made in its primary market area over the years.

Tangible common equity (TCE), a non-GAAP measure, is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. It is calculated by subtracting the value of intangible assets and any preferred equity from the book value of Bancorp.

A summary of Bancorp's TCE ratios at December 31, 2012 and 2011 is shown in the following table.

(in thousands, except per share data)    December 31, 2012     December 31, 2011

Total equity                            $           205,075   $           187,686
Less goodwill                                          (682 )                (682 )
Tangible common equity                              204,393               187,004

Total assets                                      2,148,262             2,053,097
Less goodwill                                          (682 )                (682 )
Total tangible assets                             2,147,580             2,052,415

Tangible common equity ratio                           9.52 %                9.11 %

Number of outstanding shares                         13,915                13,819

Tangible common equity per share        $             14.69   $             13.53

See "Non-GAAP Financial Measures" on page 39 for reconcilement of TCE to US GAAP measures.

In December 2012, Bancorp announced it had entered into an agreement to merge with The Bancorp, Inc., parent company of THE BANK - Oldham County, Inc., with assets of approximately $137 million. As a result, of the transaction, THE BANK
- Oldham County will merge into Stock Yards Bank and Trust and The Bancorp, Inc. will no longer exist. Each share of The Bancorp, Inc. common stock will be converted to $185.81 in cash and 12.7557 shares of S.Y. Bancorp common stock, subject to certain adjustments. The merger is subject to regulatory approvals and the approval of shareholders of The Bancorp, Inc., and is expected to close early in the second quarter of 2013. It is expected to be slightly accretive to earnings per share for 2013, excluding transaction costs, and more so thereafter.

Challenges for 2013 will include managing credit quality, achieving continued loan growth, and managing increasing regulatory requirements.

† Bancorp expects net interest margin to compress in 2013, compared to the level achieved in 2012, as rates are expected to be largely unchanged through the fourth quarter of 2013. Loan prepayment and prevailing lower rates will likely result in a lower net interest margin for 2013. Increased deposit and loan rate competition could negatively impact this expectation, as could a decrease in longer term interest rates. Management expects margin compression to continue in 2013, with net interest margin declining up to 30 basis points from 2012.

† The Federal Reserve Board lowered its key short term rate in 2008 to unprecedentedly low levels, and rates have remained low through 2012. Indications are that the Federal Reserve will likely keep short term rates low through late 2014. Approximately 40% of the Bank's loans are indexed to the prime interest rate and reprice immediately with Federal Reserve rate changes. However, approximately 61% of variable rate loans have reached their contractual floor of 4% or higher, meaning they will not reprice

immediately when the prime rate increases. Deposit rates generally do not reprice as quickly as loans. Once rates begin to rise, Bancorp's net interest margin likely will be negatively affected until the increase in the prime rate exceeds 75 basis points from today's levels.

† Bancorp's goals for 2013 include net loan growth at a pace exceeding that of 2012. This will be impacted by competition, prevailing economic conditions, and the impact of prepayments in the loan portfolio. Bancorp believes there is an opportunity for growth, and Bancorp's ability to deliver attractive growth over the long-term is linked to Bancorp's success in each market.

† Management continues to be concerned that a continued economic recession will cause a higher level of non-performing loans and potentially lower loan demand, both of which would negatively impact net income. The extended duration of the economic downturn continues to weaken already stressed borrowers. These conditions will likely have an ongoing effect on certain borrowers until overall business and real estate conditions improve.

† Bancorp expects a decrease in non-interest income for 2013 in gains on sales of mortgage loans held for sale, as Bancorp does not expect the volume of refinance activity to continue at the pace experienced in 2012. Bancorp has experienced a larger volume of loans to purchase homes, a sign of improving housing markets, which should partially offset effects of decreased refinance activity. Bancorp expects year-over-year increases in non-interest expense including personnel and data processing expenses.

† Bancorp anticipates higher non-interest expenses to meet the ongoing and increasing burden of additional regulatory requirements.

† Bancorp expects the merger with The Bancorp, Inc. to be finalized early in the second quarter of 2013. Various operating systems must be converted, in most cases, to Bancorp's existing operating systems. These systems conversions require a significant amount of planning, coordination and effort of internal resources and third-party vendors, all of which are expected to result in increased non-interest expenses in 2013.

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

Results of Operations

Net income was $25,801,000 or $1.85 per share on a diluted basis for 2012 compared to $23,604,000 or $1.71 per share for 2011 and $22,953,000 or $1.67 per share for 2010. Net income for 2012 was positively impacted by:

†          A $5.2 million or 16% increase in non-interest income.

†          A $3.2 million or 5% increase in net interest income.

†          A $1.1 million or 9% decrease in provision for loan losses.

Net income for 2012 was negatively impacted by:

† A $5.9 million or 10% increase in non-interest expenses.

† A $1.4 million or 18% increase in income tax expense

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

Net Interest Income

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

Comparative information regarding net interest income follows:

                                                                              2012/2011     2011/2010
(Dollars in thousands)            2012            2011            2010         Change        Change

Net interest income,
tax-equivalent basis          $     75,653    $     72,262    $     68,264          4.7 %         5.9 %
Net interest spread                   3.74 %          3.79 %          3.74 %         (5 )bp         5 bp
Net interest margin                   3.94 %          3.99 %          3.99 %         (5 )bp         0 bp
Average earning assets        $  1,922,134    $  1,809,043    $  1,712,173          6.3 %         5.7 %
Five year Treasury bond
rate at year end                      0.73 %          0.83 %          2.02 %        (10 )bp      (119 )bp
Average five year Treasury
bond rate                             0.75 %          1.50 %          1.91 %        (75 )bp       (41 )bp
Prime rate at year end                3.25 %          3.25 %          3.25 %          0 bp          0 bp
Average prime rate                    3.25 %          3.25 %          3.25 %          0 bp          0 bp

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

All references above to net interest margin consistently apply a methodology for calculating net interest margin and net interest spread to exclude participation loans sold from the calculations. Such loans remain on Bancorp's balance sheet as required by generally accepted accounting principles because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion of these loans. Under this methodology, these participation loans sold are excluded in the calculation of margins, which, in Bancorp's view, provides a more accurate determination of the performance of its loan portfolio.

Prime rate and the five year Treasury bond rate are included above to provide a general indication of the interest rate environment in which the Bank operated.
Approximately $606 million, or 38%, of the Bank's loans are variable rate; most of these loans are indexed to the prime rate and may reprice as that rate changes. However, approximately $371 million, or 61% of variable rate loans, have reached their contractual floor of 4% or higher. Approximately $88 million or 15% of variable rate loans have contractual floors below 4%. The remaining $147 million or 24% of variable rate loans have no contractual floor. The Bank intends to establish floors whenever possible upon renewal of the loans. The Bank's variable rate loans are primarily comprised of commercial lines of credit and real estate loans. At inception, most of the Bank's fixed rate loans are priced in relation to the five year Treasury bond.

Average loan balances increased $39 million or 2.6% in 2012; however, the declining interest rate environment drove average loan yields lower by 10 basis points. Bancorp grew average interest bearing deposits $46 million or 3.6%. Average interest costs on interest bearing deposits decreased 25 basis points, again reflecting the declining interest rate market and a more favorable mix of deposits. Average Federal Home Loan Bank ("FHLB") advances decreased by $300,000 or 0.5%, with average rates increasing by 167 basis points. In the fourth quarter of 2012, Bancorp prepaid $30 million of fixed rate advances, incurring $1.06 million in prepayment penalties, which were recorded as interest expense. Rate changes, combined with volume changes on loans and deposits, resulted in higher net interest income, but a lower net interest margin for 2012 compared to 2011.

Management anticipates a stable prime rate for 2013. Time deposit maturities of approximately $83 million, or 22% of total time deposits, in the first two quarters could spark slight improvement in interest expense. However, this will be offset by declining overall rates in the loan portfolio as persistent low prevailing rates are expected to continue to erode the overall yield on loans and investments. The margin could be further affected negatively if competition causes increases in deposit rates or a greater than expected decline in loan pricing in Bancorp's markets.

Net interest margin in 2012 reflected a higher amount of prepayment fees associated with a surge in loan refinancing activity. Adjusting for these sources of additional income, Bancorp's more normalized or core net interest margin has trended downward throughout 2012, declining to 3.88% for 2012 from 4.01% for 2011. (See "Non-GAAP Financial Measures" on page 39 for reconcilement of non-GAAP measures to US GAAP measures.) The core net margin for the year 2012 declined 13 basis points to 3.88% from 4.01% for the year 2011. Management believes these core margins better reveal the increasing pressure of a low interest rate environment and a highly competitive loan market, and it expects margin compression to continue in 2013, with net interest margin declining up to 30 basis points from 2012.

Asset/Liability Management and Interest Rate Risk

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

Interest Rate Simulation Sensitivity Analysis

Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one year forecast. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and does not indicate actual expected results.

The December 31, 2012 simulation analysis, which shows very little interest rate . . .