Edgar Filing: Stock Yards Bancorp, Inc.

sybt20170930_10q.htm

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 September 30, 2017

☐	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		(I.R.S. Employer
incorporation or organization)		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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth 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	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No ☑

The number of shares of the registrant’s Common Stock, no par value, outstanding as of October 26, 2017 was 22,670,610.

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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 September 30, 2017 (Unaudited) and December 31, 2016	3

	Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2017 and 2016	4

	Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2017 and 2016	5

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2017 and 2016	6

	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2017 and 2016	7

	Notes to Consolidated Financial Statements (Unaudited)	8


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68

Item 4.	Controls and Procedures	69


PART II – OTHER INFORMATION


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69

Item 6.	Exhibits	70

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Stock Yards Bancorp, inc. and subsidiary

Index

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
COSO	Committee of Sponsoring Organizations
CRA	Community Reinvestment Act of 1977
Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act
EPS	Earnings Per Share
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
WM&T	Wealth Management and Trust Department
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
TDRs	Troubled Debt Restructurings
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

September 30, 2017 (unaudited) and December 31, 2016

(In thousands, except share data)

	September 30,			December 31,
	2017			2016
Assets

Cash and due from banks	$	47,700		$	39,709
Federal funds sold and interest bearing deposits		81,378			8,264
Cash and cash equivalents		129,078			47,973
Mortgage loans held for sale		5,459			3,213
Securities available-for-sale (amortized cost of $571,953 in 2017 and $571,936 in 2016)		571,522			570,074
Federal Home Loan Bank stock and other securities		7,666			6,347
Loans		2,335,120			2,305,375
Less allowance for loan losses		24,948			24,007
Net loans		2,310,172			2,281,368

Premises and equipment, net		41,498			42,384
Bank owned life insurance		31,854			31,867
Accrued interest receivable		8,162			6,878
Other assets		50,502			49,377
Total assets	$	3,155,913		$	3,039,481


Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	676,824		$	680,156
Interest bearing		1,805,142			1,840,392
Total deposits		2,481,966			2,520,548

Securities sold under agreements to repurchase		71,863			67,595
Federal funds purchased and other short-term borrowings		161,961			47,374
Federal Home Loan Bank advances		50,110			51,075
Accrued interest payable		212			144
Other liabilities		55,546			38,873
Total liabilities		2,821,658			2,725,609

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 22,669,339 and 22,617,098 shares in 2017 and 2016, respectively		36,424			36,250
Additional paid-in capital		30,681			26,682
Retained earnings		267,681			252,439
Accumulated other comprehensive loss		(531	)		(1,499	)
Total stockholders’ equity		334,255			313,872
Total liabilities and stockholders’ equity	$	3,155,913		$	3,039,481

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 nine months ended September 30, 2017 and 2016
(In thousands, except per share data)

	For three months ended				For the nine months ended
	September 30,				September 30,
	2017		2016		2017		2016
Interest income:
Loans	$	25,401	$	23,436	$	73,812	$	67,992
Federal funds sold and interest bearing deposits		388		95		798		395
Mortgage loans held for sale		48		66		145		185
Securities – taxable		2,003		2,047		6,173		6,325
Securities – tax-exempt		271		298		829		907
Total interest income		28,111		25,942		81,757		75,804
Interest expense:
Deposits		1,593		941		4,237		2,916
Federal funds purchased and other short-term borrowing		77		19		125		57
Securities sold under agreements to repurchase		33		38		100		100
Federal Home Loan Bank advances		244		184		715		552
Total interest expense		1,947		1,182		5,177		3,625
Net interest income		26,164		24,760		76,580		72,179
Provision for loan losses		150		1,250		1,650		2,500
Net interest income after provision for loan losses		26,014		23,510		74,930		69,679
Non-interest income:
Wealth management and trust services		5,025		4,800		15,272		14,219
Service charges on deposit accounts		2,522		2,544		7,368		6,952
Bankcard transactions		1,492		1,455		4,412		4,198
Mortgage banking		781		1,072		2,380		2,896
Gain on call of securities available for sale		31		—		31		—
Securities brokerage		551		558		1,584		1,539
Bank owned life insurance		204		216		964		657
Other		497		713		1,564		1,757
Total non-interest income		11,103		11,358		33,575		32,218
Non-interest expenses:
Salaries and employee benefits		12,983		12,048		39,244		36,214
Net occupancy		1,621		1,646		4,765		4,716
Data processing		1,920		1,747		5,909		5,172
Furniture and equipment		316		277		861		853
FDIC insurance		242		356		716		1,035
Amortization of investments in tax credit partnerships		616		1,015		1,847		3,046
Other		3,619		3,429		10,469		9,215
Total non-interest expenses		21,317		20,518		63,811		60,251
Income before income taxes		15,800		14,350		44,694		41,646
Income tax expense		4,096		3,883		11,597		11,235
Net income	$	11,704	$	10,467	$	33,097	$	30,411
Net income per share:
Basic	$	0.52	$	0.47	$	1.47	$	1.36
Diluted	$	0.51	$	0.46	$	1.44	$	1.34
Average common shares:
Basic		22,542		22,385		22,524		22,325
Diluted		22,964		22,803		22,984		22,711

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 nine months ended September 30, 2017 and 2016

(In thousands)

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
Net income	$	11,704		$	10,467		$	33,097		$	30,411
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized gains (losses) arising during the period, net of tax $29, ($616), $512, and $2,213, respectively		56			(1,147	)		950			4,110
Reclassification adjustment for securities (gains) realized in income (net of tax of $(11), $0, $(11), and $0, respectively)		(20	)		—			(20	)		—
Unrealized losses on hedging instruments:
Unrealized gains (losses) arising during the period, net of tax benefit of $23, $74, $21, ($162), respectively		43			137			38			(301	)
Other comprehensive income (loss), net of tax		79			(1,010	)		968			3,809
Comprehensive income	$	11,783		$	9,457		$	34,065		$	34,220

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 nine months ended September 30, 2017 and 2016

(In thousands, except per share data)

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

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

Net income		-			-			-			30,411			-			30,411

Other comprehensive income, net of tax		-			-			-			-			3,809			3,809

Stock compensation expense		-			-			1,646			-			-			1,646

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		159			527			3,404			(2,903	)		-			1,028

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

Cash dividends, $0.53 per share		-			-			-			(11,843	)		-			(11,843	)

Shares cancelled		(9	)		(31	)		(224	)		255			-			-

Balance September 30, 2016		22,563		$	36,068		$	24,050		$	247,011		$	4,441		$	311,570

Balance December 31, 2016		22,617		$	36,250		$	26,682		$	252,439		$	(1,499	)	$	313,872

Net income		-			-			-			33,097			-			33,097

Other comprehensive income, net of tax		-			-			-			-			968			968

Stock compensation expense		-			-			2,012			-			-			2,012

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		59			198			2,142			(4,669	)		-			(2,329	)

Cash dividends, $0.59 per share		-			-			-			(13,365	)		-			(13,365	)

Shares cancelled		(7	)		(24	)		(155	)		179			-			-

Balance September 30, 2017		22,669		$	36,424		$	30,681		$	267,681		$	(531	)	$	334,255

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 nine months ended September 30, 2017 and 2016
(In thousands)

	2017			2016
Operating activities:
Net income	$	33,097		$	30,411
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,650			2,500
Depreciation, amortization and accretion, net		6,848			8,016
Deferred income tax provision		(1,811	)		(320	)
Gain on call of securities available for sale		(31	)		—
Gain on sales of mortgage loans held for sale		(1,453	)		(1,825	)
Origination of mortgage loans held for sale		(74,857	)		(91,195	)
Proceeds from sale of mortgage loans held for sale		74,064			93,861
Bank owned life insurance income		(964	)		(657	)
Loss on the disposal of premises and equipment		-			163
(Gain) on the sale of foreclosed assets		(39	)		(382	)
Stock compensation expense		2,012			1,646
Excess tax benefits from share-based compensation arrangements		(1,353	)		(963	)
Decrease in accrued interest receivable and other assets		(5,651	)		(6,145	)
Increase in accrued interest payable and other liabilities		18,062			14,253
Net cash provided by operating activities		49,574			49,363
Investing activities:
Purchases of securities available for sale		(422,190	)		(327,711	)
Proceeds from sale of securities available for sale		-			-
Proceeds from maturities of securities available for sale		420,179			355,943
Purchase of Federal Home Loan Bank stock		(1,319	)		-
Net increase in loans		(30,454	)		(191,793	)
Purchases of premises and equipment		(1,733	)		(5,853	)
Proceeds from mortality benefit of bank owned life insurance		970			-
Proceeds from sale of foreclosed assets		2,432			1,403
Net cash used in investing activities		(32,115	)		(168,011	)
Financing activities:
Net (decrease) increase in deposits		(38,582	)		18,895
Net increase in securities sold under agreements to repurchase and federal funds purchased		118,855			56,699
Proceeds from Federal Home Loan Bank advances		90,000			199,000
Repayments of Federal Home Loan Bank advances		(90,965	)		(191,102	)
Proceeds (used for) and received from settlement of stock awards		(216	)		1,599
Excess tax benefits from share-based compensation arrangements		-			963
Common stock repurchases		(2,113	)		(1,534	)
Cash dividends paid		(13,333	)		(11,812	)
Net cash provided by financing activities		63,646			72,708
Net increase (decrease) in cash and cash equivalents		81,105			(45,940	)
Cash and cash equivalents at beginning of period		47,973			103,833
Cash and cash equivalents at end of period	$	129,078		$	57,893
Supplemental cash flow information:
Income tax payments	$	11,063		$	9,190
Cash paid for interest		5,109			3,636
Supplemental non-cash activity:
Transfers from loans to foreclosed assets	$	-		$	1,522

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 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 inter-company 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 reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and 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 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, 2016 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 nine-month periods ended September 30, 2017 are not necessarily indicative of results for the entire year.

Critical Accounting Policies

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 uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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 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 for loan losses reflects an allowance methodology driven by risk ratings, historical losses, specific loan loss allocations, 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 first quarter of 2017, Bancorp extended the historical period used to capture Bancorp’s historical loss ratios from 24 quarters to 28 quarters. This extension of the historical period was applied to all classes and segments of the portfolio. The expansion of the look-back period for the historical loss rates used in the quantitative allocation caused management to review the overall methodology for the qualitative factors to ensure Bancorp was appropriately capturing the risk not addressed in the historical loss rates used in the quantitative allocation, resulting in the same expansion of the look-back period for the qualitative factors. 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, 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 impact and any associated risks related to this policy on Bancorp’s business operations are discussed in the “Allowance for Loan Losses” section below.

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Stock Yards Bancorp, inc. and subsidiary

Bancorp’s allowance calculation includes allocations to loan portfolio segments at September 30, 2017 for qualitative factors including, among other factors, local economic and business conditions in each of our primary markets, 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, changes in value of underlying collateral for collateral-dependent loans, effect of other external factors such as the national economic and business trends, quality and depth of the loan review function, and management’s judgement of current trends and potential risks. 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 criteria used in this evaluation or 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 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
September 30, 2017	cost		Gains		Losses		Fair value

Government sponsored enterprise obligations	$	372,596	$	846	$	778	$	372,664
Mortgage-backed securities - government agencies		147,604		697		1,581		146,720
Obligations of states and political subdivisions		51,100		611		89		51,622
Corporate equity securities		653		-		137		516

Total securities available for sale	$	571,953	$	2,154	$	2,585	$	571,522

December 31, 2016
U.S. Treasury and other U.S. Government obligations	$	74,997	$	1	$	-	$	74,998
Government sponsored enterprise obligations		268,784		800		1,494		268,090
Mortgage-backed securities - government agencies		170,344		735		2,236		168,843
Obligations of states and political subdivisions		57,158		682		396		57,444
Corporate equity securities		653		46		-		699

Total securities available for sale	$	571,936	$	2,264	$	4,126	$	570,074

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 September 30, 2017 or December 31, 2016.

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Stock Yards Bancorp, inc. and subsidiary

Bancorp sold no securities during the three or nine month periods ending September 30, 2016 or 2017. One security was called prior to maturity in the third quarter of 2017 resulting in the receipt of a pre-payment penalty. The penalty income was classified as a realized gain on the call of available for sale securities.

A summary of the available-for-sale investment securities by contractual maturity groupings as of September 30, 2017 is shown below.

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

Due within 1 year	$	216,651	$	216,696
Due after 1 but within 5 years		74,383		74,529
Due after 5 but within 10 years		14,085		14,031
Due after 10 years		118,577		119,030
Mortgage-backed securities - government agencies		147,604		146,720
Corporate equity securities		653		516

Total securities available-for-sale	$	571,953	$	571,522

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 underlying collateral.

Bancorp pledges portions of its investment securities portfolio to secure public fund deposits, cash balances of certain wealth management and trust accounts, and securities sold under agreements to repurchase. The carrying value of these pledged securities was approximately $329.7 million at September 30, 2017 and $380.4 million at December 31, 2016.

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Stock Yards Bancorp, inc. and subsidiary

Securities with unrealized losses at September 30, 2017 and December 31, 2016, 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
September 30, 2017	value		losses		value		losses		value		losses

Government sponsored enterprise obligations	$	190,462	$	135	$	70,176	$	643	$	260,638	$	778
Mortgage-backed securities - government agencies		13,227		117		65,781		1,464		79,008		1,581
Obligations of states and political subdivisions		9,307		13		6,287		76		15,594		89
Corporate equity securities		516		137		-		-		516		137

Total temporarily impaired securities	$	213,512	$	402	$	142,244	$	2,183	$	355,756	$	2,585

December 31, 2016
Government sponsored enterprise obligations	$	154,951	$	1,344	$	3,485	$	150	$	158,436	$	1,494
Mortgage-backed securities - government agencies		115,374		1,873		9,914		363		125,288		2,236
Obligations of states and political subdivisions		29,893		380		1,478		16		31,371		396

Total temporarily impaired securities	$	300,218	$	3,597	$	14,877	$	529	$	315,095	$	4,126

Applicable dates for determining when securities are in an unrealized loss position are September 30, 2017 and December 31, 2016. 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. 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 September 30, 2017.

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

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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)	September 30, 2017		December 31, 2016
Commercial and industrial	$	750,728	$	736,841
Construction and development, excluding undeveloped land		174,310		192,348
Undeveloped land		20,989		21,496

Real estate mortgage:
Commercial investment		576,810		538,886
Owner occupied commercial		397,804		408,292
1-4 family residential		261,707		249,498
Home equity - first lien		51,925		55,325
Home equity - junior lien		63,416		67,519
Subtotal: Real estate mortgage		1,351,662		1,319,520

Consumer		37,431		35,170

Total loans	$	2,335,120	$	2,305,375

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Stock Yards Bancorp, inc. and subsidiary

The following table presents the balance of the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of September 30, 2017 and December 31, 2016.

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
September 30, 2017	industrial		land		land		mortgage		Consumer		Total

Loans	$	750,728	$	174,310	$	20,989	$	1,351,662	$	37,431	$	2,335,120

Loans collectively evaluated for impairment	$	748,591	$	173,573	$	20,515	$	1,348,774	$	37,375	$	2,328,828

Loans individually evaluated for impairment	$	2,137	$	737	$	474	$	2,403	$	56	$	5,807

Loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	485	$	-	$	485

				Construction
				and development
	Commercial			excluding
	and			undeveloped		Undeveloped			Real estate
	industrial			land		land			mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2016	$	10,483		$	1,923	$	684		$	10,573		$	344		$	24,007
Provision (credit)		1,518			9		(85	)		54			154			1,650
Charge-offs		(770	)		-		-			(45	)		(418	)		(1,233	)
Recoveries		128			-		-			98			298			524
At September 30, 2017	$	11,359		$	1,932	$	599		$	10,680		$	378		$	24,948

Allowance for loans collectively evaluated for impairment	$	10,705		$	1,932	$	599		$	10,668		$	322		$	24,226

Allowance for loans individually evaluated for impairment	$	654		$	-	$	-		$	12		$	56		$	722

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, 2016	industrial		land		land		mortgage		Consumer		Total

Loans	$	736,841	$	192,348	$	21,496	$	1,319,520	$	35,170	$	2,305,375

Loans collectively evaluated for impairment	$	734,139	$	191,810	$	21,022	$	1,316,400	$	35,111	$	2,298,482

Loans individually evaluated for impairment	$	2,682	$	538	$	474	$	2,516	$	59	$	6,269

Loans acquired with deteriorated credit quality	$	20	$	-	$	-	$	604	$	-	$	624

				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)		2,775			275			(130	)		(68	)		148			3,000
Charge-offs		(1,216	)		(133	)		-			(576	)		(568	)		(2,493	)
Recoveries		279			21			-			342			417			1,059
At December 31, 2016	$	10,483		$	1,923		$	684		$	10,573		$	344		$	24,007

Allowance for loans collectively evaluated for impairment	$	9,276		$	1,923		$	683		$	10,573		$	285		$	22,740

Allowance for loans individually evaluated for impairment	$	1,207		$	-		$	1		$	-		$	59		$	1,267

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

The considerations by Bancorp in computing its allowance for loan losses are determined based on 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 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 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 development projects. In most cases, construction loans require interest only 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. 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 primarily dependent upon the financial strength of the borrower, and can be affected by market conditions and time to develop land for ultimate sale. Credit risk is also affected by availability of development financing to the extent such financing is not being provided by Bancorp.

●

Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential and commercial real estate 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 and to a lesser extent, the borrower. Underlying properties are generally located in Bancorp's primary market areas. Cash flows of income producing investment properties may be adversely impacted by a downturn in the economy that may cause increased vacancy rates, which in turn, could have an effect on credit quality. Overall health of the economy, including 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, could have a significant effect on credit quality in this loan category.

Bancorp has loans that were acquired 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 September 30, 2017 and December 31, 2016. 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, 2015	$	3		$	189

Accretion		(3	)		(41	)
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at December 31, 2016	$	-		$	148

Accretion		-			-
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at September 30, 2017	$	-		$	148

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Stock Yards Bancorp, inc. and subsidiary

The following tables present loans individually evaluated for impairment as of September 30, 2017 and December 31, 2016.

			Unpaid				Average
(in thousands)	Recorded		principal		Related		recorded
September 30, 2017	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	350	$	540	$	-	$	228
Construction and development, excluding undeveloped land		737		907		-		533
Undeveloped land		474		506		-		413

Real estate mortgage
Commercial investment		55		55		-		124
Owner occupied commercial		1,470		1,908		-		1,264
1-4 family residential		785		785		-		759
Home equity - first lien		-		-		-		-
Home equity - junior lien		81		81		-		224
Subtotal: Real estate mortgage		2,391		2,829		-		2,371

Consumer		-		17		-		-
Subtotal	$	3,952	$	4,799	$	-	$	3,545

Loans with an allowance recorded:
Commercial and industrial	$	1,787	$	2,321	$	654	$	2,343
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		60

Real estate mortgage
Commercial investment		-		-		-		-
Owner occupied commercial		-		-		-		-
1-4 family residential		12		12		12		3
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		12		12		12		3

Consumer		56		56		56		58
Subtotal	$	1,855	$	2,389	$	722	$	2,464

Total:
Commercial and industrial	$	2,137	$	2,861	$	654	$	2,571
Construction and development, excluding undeveloped land		737		907		-		533
Undeveloped land		474		506		-		473

Real estate mortgage
Commercial investment		55		55		-		124
Owner occupied commercial		1,470		1,908		-		1,264
1-4 family residential		797		797		12		762
Home equity - first lien		-		-		-		-
Home equity - junior lien		81		81		-		224
Subtotal: Real estate mortgage		2,403		2,841		12		2,374

Consumer		56		73		56		58
Total	$	5,807	$	7,188	$	722	$	6,009

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Stock Yards Bancorp, inc. and subsidiary

			Unpaid				Average
(in thousands)	Recorded		principal		Related		recorded
December 31, 2016	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	322	$	465	$	-	$	1,947
Construction and development, excluding undeveloped land		538		708		-		108
Undeveloped land		233		265		-		76

Real estate mortgage
Commercial investment		107		107		-		193
Owner occupied commercial		1,042		1,479		-		1,356
1-4 family residential		895		896		-		962
Home equity - first lien		-		-		-		3
Home equity - junior lien		472		472		-		333
Subtotal: Real estate mortgage		2,516		2,954		-		2,847

Consumer		-		-		-		18
Subtotal	$	3,609	$	4,392	$	-	$	4,996

Loans with an allowance recorded:
Commercial and industrial	$	2,360	$	2,835	$	1,207	$	1,619
Construction and development, excluding undeveloped land		-		-		-		182
Undeveloped land		241		241		1		149

Real estate mortgage
Commercial investment		-		-		-		-
Owner occupied commercial		-		-		-		554
1-4 family residential		-		-		-		-
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		-		-		-		554

Consumer		59		59		59		63
Subtotal	$	2,660	$	3,135	$	1,267	$	2,567

Total:
Commercial and industrial	$	2,682	$	3,300	$	1,207	$	3,566
Construction and development, excluding undeveloped land		538		708		-		290
Undeveloped land		474		506		1		225

Real estate mortgage		-		-		-		-
Commercial investment		107		107		-		193
Owner occupied commercial		1,042		1,479		-		1,910
1-4 family residential		895		896		-		962
Home equity - first lien		-		-		-		3
Home equity - junior lien		472		472		-		333
Subtotal: Real estate mortgage		2,516		2,954		-		3,401

Consumer		59		59		59		81
Total	$	6,269	$	7,527	$	1,267	$	7,563

Differences between recorded investment amounts and unpaid principal balance amounts are due to partial charge-offs and interest paid on non-accrual loans which have occurred over the life of loans. Unpaid principal balance is reduced by these items to arrive at the recorded investment in the loan.

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Stock Yards Bancorp, inc. and subsidiary

Impaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (TDRs), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over 90 days past due and still accruing interest. Bancorp had loans totaling $261 thousand past due more than 90 days and still accruing interest at September 30, 2017, compared with $438 thousand at December 31, 2016.

The following table presents the recorded investment in non-accrual loans as of September 30, 2017 and December 31, 2016.

(in thousands)	September 30, 2017		December 31, 2016

Commercial and industrial	$	1,256	$	1,767
Construction and development, excluding undeveloped land		737		538
Undeveloped land		474		474

Real estate mortgage
Commercial investment		55		107
Owner occupied commercial		1,470		1,042
1-4 family residential		785		984
Home equity - first lien		-		-
Home equity - junior lien		81		383
Subtotal: Real estate mortgage		2,391		2,516

Consumer		-		-
Total	$	4,858	$	5,295

In the course of working with borrowers, Bancorp may elect to restructure contractual terms of certain loans. Troubled debt restructurings (TDRs) occur when, for economic or legal reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider.

At September 30, 2017 Bancorp had $949 thousand of loans classified as TDRs, all of which were accruing interest consistent with their modified terms. One residential real estate loan with a recorded investment of $12 thousand was modified and classified as a TDR in the three-month period ended September 30, 2017. Interest due and unpaid was capitalized into the principal balance resulting in the TDR classification. A specific reserve was established for the entire recorded investment of this loan. One additional loan, a commercial loan with a recorded investment of $35 thousand at September 30, 2017, was modified and classified as a TDR previously in the nine-month period ended September 30, 2017. The pre and post-modification balance for this loan was $39 thousand. The monthly payment amount of this loan was modified to enable the borrower to fulfill the loan agreement. A specific reserve was established for the entire recorded investment of this loan.

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Stock Yards Bancorp, inc. and subsidiary

At September 30, 2016 Bancorp had $999 thousand of accruing loans classified as TDR. Bancorp did not modify or classify any additional loans as TDR during the three or nine month periods ended September 30, 2016.

No loans classified and reported as TDRs within the twelve months prior to September 30, 2017 defaulted during the three or nine-month periods ended September 30, 2017. Likewise, no loans classified and reported as troubled debt restructured within the twelve months prior to September 30, 2016 defaulted during the three-month or nine-month periods ended September 30, 2016. Loans accounted for as TDRs include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. Loans accounted for as TDRs are individually evaluated for impairment and, at September 30, 2017, had a total allowance allocation of $142 thousand, compared with $207 thousand at December 31, 2016.

At September 30, 2017 and December 31, 2016, Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDRs.

At September 30, 2017 formal foreclosure proceedings were in process on two loans with a total recorded investment of $75 thousand.

The following table presents aging of the recorded investment in loans as of September 30, 2017 and December 31, 2016.

													Recorded
(in thousands)							90 or more						investment
							days past						> 90 days
			30-59 days		60-89 days		due (includes		Total		Total		and
September 30, 2017	Current		past due		past due		non-accrual)		past due		loans		accruing

Commercial and industrial	$	747,316	$	2,149	$	7	$	1,256	$	3,412	$	750,728	$	-
Construction and development, excluding undeveloped land		173,573		-		-		737		737		174,310		-
Undeveloped land		20,515		-		-		474		474		20,989		-

Real estate mortgage
Commercial investment		574,088		2,667		-		55		2,722		576,810		-
Owner occupied commercial		395,924		47		363		1,470		1,880		397,804		-
1-4 family residential		259,729		330		602		1,046		1,978		261,707		261
Home equity - first lien		51,836		89		-		-		89		51,925		-