Edgar Filing: Stock Yards Bancorp, Inc.

sybt20160630_10q.htm Table Of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

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

For the transition period from _____________ to _______________.

Commission file number 1-13661

STOCK YARDS 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 including zip code)

(502) 582-2571

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

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

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

Large accelerated filer	☐	Accelerated filer	☑

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

Yes ☐ No ☑

The number of shares of the registrant’s Common Stock, no par value, outstanding as of July 28, 2016, was 22,513,507.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Index

Item		Page

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

The following consolidated financial statements of Stock Yards Bancorp, Inc. and Subsidiary are submitted herewith:

	Consolidated Balance Sheets June 30, 2016 (Unaudited) and December 31, 2015	3

	Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2016 and 2015	5

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the six months ended June 30, 2016 and 2015	6

	Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2016 and 2015	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58

Item 4.	Controls and Procedures	58

PART II – OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 6.	Exhibits	59

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

PART I – FINANCIAL INFORMATION

Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:

ASU	Accounting Standards Update

Bancorp	Stock Yards Bancorp, Inc.

Bank	Stock Yards Bank & Trust Company

BOLI	Bank Owned Life Insurance

BP	Basis Point = 1/100^th of one percent

Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act

FASB	Financial Accounting Standards Board

FDIC	Federal Deposit Insurance Corporation

FHA	Federal Housing Administration

FHLB	Federal Home Loan Bank

FHLMC	Federal Home Loan Mortgage Corporation

FNMA	Federal National Mortgage Association

GNMA	Government National Mortgage Association

IM&T	Investment Management and Trust

LIBOR	London Interbank Offered Rate

MSR	Mortgage Servicing Right

OAEM	Other Assets Especially Mentioned

OREO	Other Real Estate Owned

PSU	Performance Stock Unit

RSU	Restricted Stock Unit

SAR	Stock Appreciation Right

SEC	Securities and Exchange Commission

TDR	Troubled Debt Restructuring

US GAAP	United States Generally Accepted Accounting Principles

VA	U.S. Department of Veterans Affairs

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Item 1. Financial Statements

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2016 and December 31, 2015

(In thousands, except share data)

	June 30,		December 31,
	2016		2015
	(Unaudited)
Assets
Cash and due from banks	$	40,618	$	35,895
Federal funds sold		9,616		67,938
Cash and cash equivalents		50,234		103,833
Mortgage loans held for sale		6,405		6,800
Securities available-for-sale (amortized cost of $557,735 in 2016 and $564,391 in 2015)		567,307		565,876
Federal Home Loan Bank stock and other securities		6,347		6,347
Loans		2,175,551		2,033,007
Less allowance for loan losses		23,141		22,441
Net loans		2,152,410		2,010,566
Premises and equipment, net		42,718		39,557
Bank owned life insurance		31,437		30,996
Accrued interest receivable		6,799		6,610
Other assets		45,862		46,216
Total assets	$	2,909,519	$	2,816,801
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	637,812	$	583,768
Interest bearing		1,712,136		1,787,934
Total deposits		2,349,948		2,371,702
Securities sold under agreements to repurchase		57,437		64,526
Federal funds purchased and other short-term borrowing		114,154		22,477
Federal Home Loan Bank advances		43,002		43,468
Accrued interest payable		132		127
Other liabilities		39,795		27,982
Total liabilities		2,604,468		2,530,282
Stockholders’ equity:
Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding		—		—
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 22,510,205 and 14,919,351 shares in 2016 and 2015, respectively		35,894		10,616
Additional paid-in capital		21,962		44,180
Retained earnings		241,745		231,091
Accumulated other comprehensive income		5,450		632
Total stockholders’ equity		305,051		286,519
Total liabilities and stockholders’ equity	$	2,909,519	$	2,816,801

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income (Unaudited)

For the three and six months ended June 30, 2016 and 2015

(In thousands, except per share data)

	For three months ended				For six months ended
	June 30,				June 30,
	2016		2015		2016		2015
Interest income:
Loans	$	22,563	$	20,612	$	44,556	$	41,027
Federal funds sold		111		51		300		119
Mortgage loans held for sale		59		74		119		113
Securities – taxable		2,123		1,969		4,278		4,003
Securities – tax-exempt		306		294		609		585
Total interest income		25,162		23,000		49,862		45,847
Interest expense:
Deposits		979		938		1,975		1,911
Federal funds purchased and other short-term borrowing		23		5		38		12
Securities sold under agreements to repurchase		29		32		62		69
Federal Home Loan Bank advances		181		224		368		440
Total interest expense		1,212		1,199		2,443		2,432
Net interest income		23,950		21,801		47,419		43,415
Provision for loan losses		750		—		1,250		—
Net interest income after provision for loan losses		23,200		21,801		46,169		43,415
Non-interest income:
Investment management and trust services		4,807		4,651		9,419		9,203
Service charges on deposit accounts		2,262		2,199		4,408		4,279
Bankcard transaction revenue		1,433		1,246		2,743		2,368
Mortgage banking revenue		1,030		913		1,824		1,741
Brokerage commissions and fees		538		499		981		960
Bank owned life insurance income		220		226		441		448
Other		488		485		1,044		893
Total non-interest income		10,778		10,219		20,860		19,892
Non-interest expenses:
Salaries and employee benefits		11,971		11,383		24,166		22,483
Net occupancy expense		1,546		1,450		3,070		2,919
Data processing expense		1,881		1,756		3,425		3,210
Furniture and equipment expense		291		260		576		507
FDIC insurance expense		351		317		679		614
Amortization of investment in tax credit partnerships		1,016		159		2,031		317
Other		3,137		3,542		5,786		6,596
Total non-interest expenses		20,193		18,867		39,733		36,646
Income before income taxes		13,785		13,153		27,296		26,661
Income tax expense		3,676		4,151		7,352		8,404
Net income		10,109		9,002		19,944		18,257
Net income per share:
Basic	$	0.45	$	0.41	$	0.89	$	0.83
Diluted	$	0.45	$	0.40	$	0.88	$	0.82
Average common shares:
Basic		22,336		22,065		22,295		22,018
Diluted		22,704		22,404		22,658		22,353

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

For the three and six months ended June 30, 2016 and 2015

(In thousands)

	Three months ended						Six months ended
	June 30,						June 30,
	2016			2015			2016			2015
Net income	$	10,109		$	9,002		$	19,944		$	18,257
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized gains (losses) arising during the period (net of tax of $863, ($1,417), $2,831 and ($405), respectively)		1,603			(2,631	)		5,256			(751	)
Unrealized losses on hedging instruments:
Unrealized losses arising during the period (net of tax of ($53), ($1), ($236) and ($11), respectively)		(99	)		(2	)		(438	)		(21	)
Other comprehensive income (loss), net of tax		1,504			(2,633	)		4,818			(772	)
Comprehensive income	$	11,613		$	6,369		$	24,762		$	17,485

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the six months ended June 30, 2016 and 2015

(In thousands, except per share data)

													Accumulated
	Common stock												other
	Number of						Additional			Retained			comprehensive
	shares			Amount			paid-in capital			earnings			income (loss)			Total

Balance December 31, 2014		14,745		$	10,035		$	38,191		$	209,584		$	2,085		$	259,895

Net income		—			—			—			18,257			—			18,257

Other comprehensive loss, net of tax		—			—			—			—			(772	)		(772	)

Stock compensation expense		—			—			995			—			—			995

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		127			422			2,608			(1,507	)		—			1,523

Cash dividends, $0.31 per share		—			—			—			(6,952	)		—			(6,952	)

Shares repurchased or cancelled		(20	)		(67	)		(581	)		84			—			(564	)

Balance June 30, 2015		14,852		$	10,390		$	41,213		$	219,466		$	1,313		$	272,382

Balance December 31, 2015		14,919		$	10,616		$	44,180		$	231,091		$	632		$	286,519

Net income		—			—			—			19,944			—			19,944

Other comprehensive income, net of tax		—			—			—			—			4,818			4,818

Stock compensation expense		—			—			1,073			—			—			1,073

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		103			342			1,829			(1,689	)		—			482

3 for 2 stock split		7,494			24,956			(24,956	)		—			—			—

Cash dividends, $0.35 per share		—			—			—			(7,785	)		—			(7,785	)

Shares repurchased or cancelled		(6	)		(20	)		(164	)		184			—			—

Balance June 30, 2016		22,510		$	35,894		$	21,962		$	241,745		$	5,450		$	305,051

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

For the six months ended June 30, 2016 and 2015

(In thousands)

	2016			2015
Operating activities:
Net income	$	19,944		$	18,257
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,250			—
Depreciation, amortization and accretion, net		5,292			3,374
Deferred income tax expense		447			1,171
Gain on sales of mortgage loans held for sale		(1,103	)		(1,133	)
Origination of mortgage loans held for sale		(57,433	)		(63,461	)
Proceeds from sale of mortgage loans held for sale		58,931			60,104
Bank owned life insurance income		(441	)		(448	)
Gain on the disposal of premises and equipment		-			(5	)
Loss (gain) on the sale of other real estate		(443	)		165
Stock compensation expense		1,073			995
Excess tax benefits from share-based compensation arrangements		(520	)		(293	)
Decrease (increase) in accrued interest receivable and other assets		(5,246	)		386
Increase (decrease) in accrued interest payable and other liabilities		12,321			(4,303	)
Net cash provided by operating activities		34,072			14,809
Investing activities:
Purchases of securities available for sale		(227,714	)		(92,730	)
Proceeds from sale of securities available for sale		—			5,934
Proceeds from maturities of securities available for sale		232,825			184,878
Net increase in loans		(144,605	)		(32,596	)
Purchases of premises and equipment		(4,660	)		(2,615	)
Proceeds from sale of foreclosed assets		1,401			1,820
Net cash provided by (used in) investing activities		(142,753	)		64,691
Financing activities:
Net decrease in deposits		(21,754	)		(51,862	)
Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased		84,588			(39,241	)
Proceeds from Federal Home Loan Bank advances		160,000			63,200
Repayments of Federal Home Loan Bank advances		(160,466	)		(61,177	)
Issuance of common stock for options and performance stock units		1,045			1,566
Excess tax benefits from share-based compensation arrangements		520			293
Common stock repurchases		(1,083	)		(900	)
Cash dividends paid		(7,768	)		(6,944	)
Net cash provided by (used in) financing activities		55,082			(95,065	)
Net decrease in cash and cash equivalents		(53,599	)		(15,565	)
Cash and cash equivalents at beginning of period		103,833			74,241
Cash and cash equivalents at end of period	$	50,234		$	58,676
Supplemental cash flow information:
Income tax payments	$	5,490		$	6,774
Cash paid for interest		2,438			2,438
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	1,511		$	232

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

(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 (US GAAP) for complete financial statements. The consolidated unaudited financial statements of Stock Yards 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 Stock Yards Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”). Significant intercompany transactions and accounts have been eliminated in consolidation. In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, valuation of available-for sale securities, other real estate owned and income tax assets, and estimated liabilities and expense.

A description of other significant accounting policies is presented in the notes to Consolidated Financial Statements for the year ended December 31, 2015 included in Stock Yards Bancorp, Inc.’s Annual Report on Form 10-K. Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.

Interim results for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results for the entire year.

Critical Accounting Policies

Management has identified the accounting policy related to the allowance and provision for loan losses as critical to the understanding of Bancorp’s results of operations and discussed this conclusion with the Audit Committee of the Board of Directors. Since the application of this policy requires significant management assumptions and estimates, it could result in materially different amounts to be reported if conditions or underlying circumstances were to change. The provision reflects an allowance methodology that is driven by risk ratings, historical losses, and qualitative factors. 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. In the second quarter of 2015, Bancorp extended the historical period used to capture Bancorp’s historical loss ratios from 12 quarters to 24 quarters. Management believes the extension of the look-back period is appropriate to capture the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. To the extent that management’s assumptions prove incorrect, the results from operations could be materially affected by a higher or lower provision for loan losses. The accounting policy related to the allowance for loan losses is applicable to the commercial banking segment of Bancorp.

The allowance for loan losses is management’s estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Bancorp’s allowance calculation includes allocations to loan portfolio segments at June 30, 2016 for qualitative factors including, among other factors, economic and business conditions in each of our primary markets, the quality and experience of lending staff and management, exceptions to lending policies, levels of and trends in past due loans and loan classifications, concentrations of credit such as collateral type, trends in portfolio growth, dependency upon the value of underlying collateral for collateral-dependent loans, effect of other external factors such as the national economic and business trends, and the quality and depth of the loan review function. Bancorp utilizes the sum of all allowance amounts derived as described above as the appropriate level of allowance for loan and lease losses. Changes in the criteria used in this evaluation or the availability of new information could cause the allowance to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan and lease losses based on their judgments and estimates.

(2)

Securities

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

(in thousands)	Amortized		Unrealized				Fair
June 30, 2016	cost		Gains		Losses		value

Government sponsored enterprise obligations	$	329,128	$	4,760	$	62	$	333,826
Mortgage-backed securities - government agencies		167,512		3,331		140		170,703
Obligations of states and political subdivisions		60,442		1,594		15		62,021
Corporate equity securities		653		104		-		757

Total securities available for sale	$	557,735	$	9,789	$	217	$	567,307

December 31, 2015
U.S. Treasury and other U.S. Government obligations	$	79,999	$	1	$	-	$	80,000
Government sponsored enterprise obligations		251,190		1,468		765		251,893
Mortgage-backed securities - government agencies		170,139		1,143		1,654		169,628
Obligations of states and political subdivisions		62,410		1,342		50		63,702
Corporate equity securities		653		-		-		653

Total securities available for sale	$	564,391	$	3,954	$	2,469	$	565,876

Corporate equity securities consist of common stock in a publicly-traded business development company.

There were no securities classified as held to maturity as of June 30, 2016 or December 31, 2015.

No securities were sold in 2016. In 2015, Bancorp sold securities with total fair market value of $5.9 million, generating no gain or loss. These securities consisted of mortgage-backed securities with small remaining balances and agency securities. These sales were made in the ordinary course of portfolio management. Management has the intent and ability to hold all remaining investment securities available-for-sale for the foreseeable future.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

A summary of the available-for-sale investment securities by contractual maturity groupings as of June 30, 2016 is shown below.

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

Due within 1 year	$	134,681	$	134,811
Due after 1 but within 5 years		120,813		122,843
Due after 5 but within 10 years		21,231		21,724
Due after 10 years		112,845		116,469
Mortgage-backed securities		167,512		170,703
Corporate equity securities		653		757
Total securities available-for-sale	$	557,735	$	567,307

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations. In addition to equity securities, the investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.

Securities with a carrying value of approximately $319.5 million at June 30, 2016 and $380.7 million at December 31, 2015 were pledged to secure accounts of commercial depositors in cash management accounts, public deposits, and cash balances for certain investment management and trust accounts.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Securities with unrealized losses at June 30, 2016 and December 31, 2015, not recognized in the statements of income are as follows:

(in thousands)	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2016	value		losses		value		losses		value		losses

Government sponsored enterprise obligations	$	109,829	$	34	$	3,842	$	28	$	113,671	$	62
Mortgage-backed securities - government agencies		1,343		2		18,589		138		19,932		140
Obligations of states and political subdivisions		2,556		8		1,338		7		3,894		15
Total temporarily impaired securities	$	113,728	$	44	$	23,769	$	173	$	137,497	$	217

December 31, 2015
Government sponsored enterprise obligations	$	102,098	$	500	$	8,469	$	265	$	110,567	$	765
Mortgage-backed securities - government agencies		49,774		662		29,936		992		79,710		1,654
Obligations of states and political subdivisions		13,225		31		1,955		19		15,180		50
Total temporarily impaired securities	$	165,097	$	1,193	$	40,360	$	1,276	$	205,457	$	2,469

Applicable dates for determining when securities are in an unrealized loss position are June 30, 2016 and December 31, 2015. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past twelve months, but is not in the “Investments with an Unrealized Loss of less than 12 months” category above.

Unrealized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is due to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach their maturity date and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consist of 23 and 70 separate investment positions as of June 30, 2016 and December 31, 2015, respectively. Because management does not intend to sell the investments, and it is not likely that Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Bancorp does not consider these securities to be other-than-temporarily impaired at June 30, 2016.

FHLB stock and other securities are investments held by Bancorp which are not readily marketable and are carried at cost. This category includes holdings of Federal Home Loan Bank of Cincinnati (FHLB) stock which are required for access to FHLB borrowing, and are classified as restricted securities.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

(3)

Loans

Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:

(in thousands)	June 30, 2016		December 31, 2015
Commercial and industrial	$	721,956	$	644,398
Construction and development, excluding undeveloped land		136,029		134,482
Undeveloped land		20,342		21,185

Real estate mortgage:
Commercial investment		572,438		528,290
Owner occupied commercial		333,862		329,365
1-4 family residential		240,770		226,575
Home equity - first lien		52,360		50,115
Home equity - junior lien		65,999		63,066
Subtotal: Real estate mortgage		1,265,429		1,197,411

Consumer		31,795		35,531

Total loans	$	2,175,551	$	2,033,007

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

The following table presents the balance in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of June 30, 2016 and December 31, 2015.

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
June 30, 2016	industrial		land		land		mortgage		Consumer		Total

Loans	$	721,956	$	136,029	$	20,342	$	1,265,429	$	31,795	$	2,175,551

Loans collectively evaluated for impairment	$	719,158	$	135,712	$	20,342	$	1,261,808	$	31,701	$	2,168,721

Loans individually evaluated for impairment	$	2,751	$	-	$	-	$	3,145	$	94	$	5,990

Loans acquired with deteriorated credit quality	$	47	$	317	$	-	$	476	$	-	$	840

				Construction
				and development
	Commercial			excluding
	and			undeveloped		Undeveloped		Real estate
	industrial			land		land		mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2015	$	8,645		$	1,760	$	814	$	10,875		$	347		$	22,441
Provision (credit)		1,602			180		46		(644	)		66			1,250
Charge-offs		(484	)		-		-		(361	)		(249	)		(1,094	)
Recoveries		127			10		-		207			200			544
At June 30, 2016	$	9,890		$	1,950	$	860	$	10,077		$	364		$	23,141

Allowance for loans collectively evaluated for impairment	$	9,604		$	1,950	$	860	$	10,070		$	301		$	22,785

Allowance for loans individually evaluated for impairment	$	286		$	-	$	-	$	7		$	63		$	356

Allowance for loans acquired with deteriorated credit quality	$	-		$	-	$	-	$	-		$	-		$	-

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
December 31, 2015	industrial		land		land		mortgage		Consumer		Total

Loans	$	644,398	$	134,482	$	21,185	$	1,197,411	$	35,531	$	2,033,007

Loans collectively evaluated for impairment	$	639,760	$	134,160	$	21,185	$	1,192,864	$	35,463	$	2,023,432

Loans individually evaluated for impairment	$	4,635	$	-	$	-	$	4,050	$	68	$	8,753

Loans acquired with deteriorated credit quality	$	3	$	322	$	-	$	497	$	-	$	822

				Construction
				and development
	Commercial			excluding
	and			undeveloped			Undeveloped			Real estate
	industrial			land			land			mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2014	$	11,819		$	721		$	1,545		$	10,541		$	294		$	24,920
Provision (credit)		793			1,065			(2,131	)		872			151			750
Charge-offs		(4,065	)		(26	)		-			(693	)		(597	)		(5,381	)
Recoveries		98			-			1,400			155			499			2,152
At December 31, 2015	$	8,645		$	1,760		$	814		$	10,875		$	347		$	22,441

Allowance for loans collectively evaluated for impairment	$	8,377		$	1,760		$	814		$	10,667		$	279		$	21,897

Allowance for loans individually evaluated for impairment	$	268		$	-		$	-		$	208		$	68		$	544

Allowance for loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

The considerations by Bancorp in computing its allowance for loan losses are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:

●

Commercial and industrial loans: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A decline in the strength of the business or a weakened economy and resultant decreased consumer and/or business spending may have an effect on the credit quality in this loan category.

●

Construction and development, excluding undeveloped land: Loans in this category primarily include owner-occupied and investment construction loans and commercial development projects. In most cases, construction loans require only interest to be paid during construction. Upon completion or stabilization, the construction loan may convert to permanent financing in the real estate mortgage segment, requiring principal amortization. Repayment of development loans is derived from sale of lots or units including any pre-sold units. Credit risk is affected by construction delays, cost overruns, market conditions and availability of permanent financing, to the extent such permanent financing is not being provided by Bancorp.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

●

Undeveloped land: Loans in this category are secured by land acquired for development by the borrower, but for which no development has yet taken place. Credit risk is affected by market conditions and time to sell lots at an adequate price. Credit risk is also affected by availability of permanent financing, to the extent such permanent financing is not being provided by Bancorp.

●

Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential real estate, owner-occupied real estate used for business purposes, and income-producing investment properties. For owner occupied residential and commercial real estate, repayment is dependent on financial strength of the borrower. For income-producing investment properties, repayment is dependent on financial strength of tenants in addition to the borrower. Underlying properties are generally located in Bancorp's primary market area. Cash flows of income producing investment properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, could have an effect on credit quality. Overall health of the economy, including unemployment rates and real estate prices, has an effect on credit quality in this loan category.

●

Consumer: Loans in this category may be either secured or unsecured and repayment is dependent on credit quality of the individual borrower and, if applicable, adequacy of collateral securing the loan. Therefore, overall health of the economy, including unemployment rates and stock prices, will have a significant effect on credit quality in this loan category.

Bancorp has loans that were acquired in the 2013 acquisition, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amount of those loans is included in the balance sheet amounts of loans at June 30, 2016 and December 31, 2015. Changes in the fair value adjustment for acquired impaired loans are shown in the following table:

(in thousands)	Accretable discount			Non-accretable discount
Balance at December 31, 2014	$	62		$	266

Accretion		(59	)		(77	)
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at December 31, 2015	$	3		$	189

Accretion		(3	)		-
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at June 30, 2016	$	-		$	189

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

The following table presents loans individually evaluated for impairment as of June 30, 2016 and December 31, 2015.

(in thousands)			Unpaid				Average
	Recorded		principal		Related		recorded
June 30, 2016	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	1,753	$	2,321	$	-	$	2,805
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		280		280		-		254
Owner occupied commercial		1,241		1,678		-		1,559
1-4 family residential		977		977		-		999
Home equity - first lien		-		-		-		4
Home equity - junior lien		253		253		-		211
Subtotal: Real estate mortgage		2,751		3,188		-		3,027

Consumer		31		31		-		21
Subtotal	$	4,535	$	5,540	$	-	$	5,853

Loans with an allowance recorded:
Commercial and industrial	$	998	$	1,473	$	286	$	1,206
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment