Note 7 - Derivative Financial Instruments

6 Months Ended

Jun. 30, 2016

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

(7) Derivative Financial Instruments

Occasionally, Bancorp enters into free-standing interest rate swaps for the benefit of its commercial customers who desire to hedge their exposure to changing interest rates. Bancorp offsets its interest rate exposure on these transactions by entering into offsetting swap agreements with substantially matching terms with approved reputable independent counterparties. These undesignated derivative instruments are recognized on the consolidated balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition are expected to have an insignificant effect on earnings. Exchanges of cash flows related to the undesignated interest rate swap agreements for the first six months of 2016 were offsetting and therefore had no net effect on Bancorp’s earnings or cash flows.

Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of nonperformance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparties to fail their obligations.

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

At June 30, 2016 and December 31, 2015, Bancorp had outstanding undesignated interest rate swap contracts as follows:

(dollar amounts in thousands)	Receiving						Paying
	June 30,			December 31,			June 30,		December 31,
	2016			2015			2016		2015
Notional amount	$	25,657		$	10,788		$	25,657	$	10,788
Weighted average maturity (years)		7.4			6.9			7.4		6.9
Fair value	$	(1,282	)	$	(461	)	$	1,282	$	461

In 2013, Bancorp entered into an interest rate swap to hedge cash flows of a $10 million rolling fixed-rate three-month FHLB borrowing. The swap began December 6, 2013 and ends December 6, 2016. In 2015, Bancorp entered into an interest rate swap to hedge cash flows of a $20 million rolling fixed-rate three-month FHLB borrowing. The swap began December 9, 2015 and matures December 6, 2020. For purposes of hedging, the rolling fixed rate advances are considered to be floating rate liabilities. The interest rate swaps involve exchange of Bancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated, and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings.

The following table details Bancorp’s derivative position designated as a cash flow hedge, and the fair values as of June 30, 2016 and December 31, 2015.

(dollars in thousands)
										Fair value
Notional		Maturity	Receive (variable)	Pay fixed			Fair value			December 31,
amount		date	index	swap rate			June 30, 2016			2015
$	10,000	12/6/2016	US 3 Month LIBOR		0.72	%	$	-		$	8
	20,000	12/6/2020	US 3 Month LIBOR		1.79	%		(766	)		(101	)
$	30,000				1.43	%	$	(766	)	$	(93	)