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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, 2017

OR

☐ 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 July 26, 2017 was 22,659,928.

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, 2017 (Unaudited) and December 31, 2016	3
Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2017 and 2016	4
Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2017 and 2016	5
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three and six months ended June 30, 2017 and 2016	6
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 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	42
Item 3. Quantitative and Qualitative Disclosures about Market Risk	68
Item 4. Controls and Procedures	68
PART II – OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 6. Exhibits	69

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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 = 1/100th 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

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

(In thousands, except share data)

	June 30,			December 31,
	2017			2016
Assets
Cash and due from banks	$	44,902		$	39,709
Federal funds sold and interest bearing deposits		80,223			8,264
Cash and cash equivalents		125,125			47,973
Mortgage loans held for sale		3,055			3,213
Securities available-for-sale (amortized cost of $576,776 in 2017 and $571,936 in 2016)		576,291			570,074
Federal Home Loan Bank stock and other securities		7,666			6,347
Loans		2,309,668			2,305,375
Less allowance for loan losses		25,115			24,007
Net loans		2,284,553			2,281,368
Premises and equipment, net		41,431			42,384
Bank owned life insurance		31,656			31,867
Accrued interest receivable		6,865			6,878
Other assets		50,120			49,377
Total assets	$	3,126,762		$	3,039,481
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	696,085		$	680,156
Interest bearing		1,782,461			1,840,392
Total deposits		2,478,546			2,520,548
Securities sold under agreements to repurchase		65,024			67,595
Federal funds purchased and other short-term borrowings		161,463			47,374
Federal Home Loan Bank advances		50,433			51,075
Accrued interest payable		187			144
Other liabilities		44,609			38,873
Total liabilities		2,800,262			2,725,609
Stockholders’ equity:
Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outsanding		-			-
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 22,662,338 and 22,617,098 shares in 2017 and 2016, respectively		36,400			36,250
Additional paid-in capital		29,753			26,682
Retained earnings		260,956			252,439
Accumulated other comprehensive loss		(609	)		(1,499	)
Total stockholders’ equity		326,500			313,872
Total liabilities and stockholders’ equity	$	3,126,762		$	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 six months ended June 30, 2017 and 2016

(In thousands, except per share data)

	For three months ended				For the six months ended
	June 30,				June 30,
	2017		2016		2017		2016
Interest income:
Loans	$	24,351	$	22,563	$	48,411	$	44,556
Federal funds sold and interest bearing deposits		276		111		410		300
Mortgage loans held for sale		53		59		97		119
Securities – taxable		2,056		2,123		4,170		4,278
Securities – tax-exempt		277		306		558		609
Total interest income		27,013		25,162		53,646		49,862
Interest expense:
Deposits		1,481		979		2,644		1,975
Federal funds purchased and other short-term borrowing		29		23		48		38
Securities sold under agreements to repurchase		32		29		67		62
Federal Home Loan Bank advances		239		181		471		368
Total interest expense		1,781		1,212		3,230		2,443
Net interest income		25,232		23,950		50,416		47,419
Provision for loan losses		600		750		1,500		1,250
Net interest income after provision for loan losses		24,632		23,200		48,916		46,169
Non-interest income:
Wealth management and trust services		5,153		4,807		10,247		9,419
Service charges on deposit accounts		2,439		2,262		4,846		4,408
Bankcard transactions		1,514		1,433		2,920		2,743
Mortgage banking		897		1,030		1,599		1,824
Securities brokerage		494		538		1,033		981
Bank owned life insurance		556		220		760		441
Other		622		488		1,067		1,044
Total non-interest income		11,675		10,778		22,472		20,860
Non-interest expenses:
Salaries and employee benefits		12,849		11,971		26,261		24,166
Net occupancy		1,514		1,546		3,144		3,070
Data processing		2,121		1,881		3,989		3,425
Furniture and equipment		268		291		545		576
FDIC insurance		244		351		474		679
Amortization of investments in tax credit partnerships		615		1,016		1,231		2,031
Other		3,735		3,137		6,850		5,786
Total non-interest expenses		21,346		20,193		42,494		39,733
Income before income taxes		14,961		13,785		28,894		27,296
Income tax expense		4,359		3,676		7,501		7,352
Net income	$	10,602	$	10,109	$	21,393	$	19,944
Net income per share:
Basic	$	0.47	$	0.45	$	0.94	$	0.89
Diluted	$	0.46	$	0.45	$	0.92	$	0.88
Average common shares:
Basic		22,783		22,336		22,788		22,295
Diluted		23,241		22,704		23,271		22,658

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, 2017 and 2016

(In thousands)

	Three months ended						Six months ended
	June 30,						June 30,
	2017			2016			2017			2016
Net income	$	10,602		$	10,109		$	21,393		$	19,944
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale:
Unrealized gains arising during the period , net of tax expense of $112, $863, $482, and $2,831, respectively		206			1,603			895			5,256
Unrealized losses on hedging instruments:
Unrealized losses arising during the period, net of tax benefit of $49, $53, $2, $236, respectively		(90	)		(99	)		(5	)		(438	)
Other comprehensive income, net of tax		116			1,504			890			4,818
Comprehensive income	$	10,718		$	11,613		$	22,283		$	24,762

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, 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		-			-			-			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 cancelled		(6	)		(20	)		(164	)		184			-			-
Balance June 30, 2016		22,510		$	35,894		$	21,962		$	241,745		$	5,450		$	305,051
Balance December 31, 2016		22,617		$	36,250		$	26,682		$	252,439		$	(1,499	)	$	313,872
Net income		-			-			-			21,393			-			21,393
Other comprehensive income, net of tax		-			-			-			-			890			890
Stock compensation expense		-			-			1,342			-			-			1,342
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		50			164			1,820			(4,146	)		-			(2,162	)
Cash dividends, $0.39 per share		-			-			-			(8,835	)		-			(8,835	)
Shares cancelled		(5	)		(14	)		(91	)		105			-			-
Balance June 30, 2017		22,662		$	36,400		$	29,753		$	260,956		$	(609	)	$	326,500

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, 2017 and 2016

(In thousands)

	2017			2016
Operating activities:
Net income	$	21,393		$	19,944
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,500			1,250
Depreciation, amortization and accretion, net		4,399			5,292
Deferred income tax provision		(517	)		447
Gain on sales of mortgage loans held for sale		(963	)		(1,103	)
Origination of mortgage loans held for sale		(49,168	)		(57,433	)
Proceeds from sale of mortgage loans held for sale		50,289			58,931
Bank owned life insurance income		(760	)		(441	)
Loss (gain) on the sale of other real estate		64			(443	)
Stock compensation expense		1,342			1,073
Excess tax benefits from share-based compensation arrangements		(1,120	)		(520	)
Decrease in accrued interest receivable and other assets		(4,015	)		(5,246	)
Increase in accrued interest payable and other liabilities		6,883			12,321
Net cash provided by operating activities		29,327			34,072
Investing activities:
Purchases of securities available for sale		(251,196	)		(227,714	)
Proceeds from sale of securities available for sale		-			-
Proceeds from maturities of securities available for sale		245,010			232,825
Purchase of Federal Home Loan Bank stock		(1,319	)		-
Net increase in loans		(4,685	)		(144,605	)
Purchases of premises and equipment		(839	)		(4,660	)
Proceeds from disposal of premises and equipment		207			-
Proceeds from mortality benefit of bank owned life insurance		970			-
Proceeds from sale of foreclosed assets		1,784			1,401
Net cash used in investing activities		(10,068	)		(142,753	)
Financing activities:
Net decrease in deposits		(42,002	)		(21,754	)
Net increase in securities sold under agreements to repurchase and federal funds purchased		111,518			84,588
Proceeds from Federal Home Loan Bank advances		60,000			160,000
Repayments of Federal Home Loan Bank advances		(60,642	)		(160,466	)
Proceeds (used for) and received from settlement of stock awards		(216	)		1,045
Excess tax benefits from share-based compensation arrangements		-			520
Common stock repurchases		(1,946	)		(1,083	)
Cash dividends paid		(8,819	)		(7,768	)
Net cash provided by financing activities		57,893			55,082
Net increase (decrease) in cash and cash equivalents		77,152			(53,599	)
Cash and cash equivalents at beginning of period		47,973			103,833
Cash and cash equivalents at end of period	$	125,125		$	50,234
Supplemental cash flow information:
Income tax payments	$	4,473		$	5,490
Cash paid for interest		3,187			2,438
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	-		$	1,511

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 six-month periods ended June 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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Bancorp’s allowance calculation includes allocations to loan portfolio segments at June 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				Fair
June 30, 2017	cost		Gains		Losses		value
Government sponsored enterprise obligations	$	366,762	$	789	$	873	$	366,678
Mortgage-backed securities - government agencies		155,933		709		1,768		154,874
Obligations of states and political subdivisions		53,428		710		102		54,036
Corporate equity securities		653		50		-		703
Total securities available for sale	$	576,776	$	2,258	$	2,743	$	576,291
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 June 30, 2017 or December 31, 2016.

Bancorp sold no securities during the three or six month periods ending June 30, 2016 or 2017.

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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, 2017 is shown below.

(in thousands)
Securities available-for-sale	Amortized cost		Fair value
Due within 1 year	$	222,639	$	222,690
Due after 1 but within 5 years		80,328		80,586
Due after 5 but within 10 years		15,689		15,626
Due after 10 years		101,534		101,812
Mortgage-backed securities – government agencies		155,933		154,874
Corporate equity securities		653		703
Total securities available-for-sale	$	576,776	$	576,291

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 $314.2 million at June 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 June 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
June 30, 2017	value		losses		value		losses		value		losses
Government sponsored enterprise obligations	$	185,503	$	663	$	37,819	$	210	$	223,322	$	873
Mortgage-backed securities - government agencies		87,161		1,383		9,952		385		97,113		1,768
Obligations of states and political subdivisions		12,948		68		2,853		34		15,801		102
Total temporarily impaired securities	$	285,612	$	2,114	$	50,624	$	629	$	336,236	$	2,743
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 June 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 June 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 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, 2017		December 31, 2016
Commercial and industrial	$	749,036	$	736,841
Construction and development, excluding undeveloped land		175,627		192,348
Undeveloped land		20,992		21,496
Real estate mortgage:
Commercial investment		547,196		538,886
Owner occupied commercial		408,558		408,292
1-4 family residential		255,939		249,498
Home equity - first lien		52,560		55,325
Home equity - junior lien		65,344		67,519
Subtotal: Real estate mortgage		1,329,597		1,319,520
Consumer		34,416		35,170
Total loans	$	2,309,668	$	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 June 30, 2017 and December 31, 2016.

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
June 30, 2017	industrial		land		land		mortgage		Consumer		Total
Loans	$	749,036	$	175,627	$	20,992	$	1,329,597	$	34,416	$	2,309,668
Loans collectively evaluated for impairment	$	746,390	$	175,215	$	20,519	$	1,326,705	$	34,359	$	2,303,188
Loans individually evaluated for impairment	$	2,624	$	412	$	473	$	2,310	$	57	$	5,876
Loans acquired with deteriorated credit quality	$	22	$	-	$	-	$	582	$	-	$	604

				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)		1,723			(110	)		(82	)		(129	)		98			1,500
Charge-offs		(482	)		-			-			(34	)		(257	)		(773	)
Recoveries		120			-			-			64			197			381
At June 30, 2017	$	11,844		$	1,813		$	602		$	10,474		$	382		$	25,115
Allowance for loans collectively evaluated for impairment	$	10,916		$	1,813		$	602		$	10,474		$	325		$	24,130
Allowance for loans individually evaluated for impairment	$	928		$	-		$	-		$	-		$	57		$	985
Allowance for loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

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(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 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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● 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 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 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 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, 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 June 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 June 30, 2017	$	-		$	148

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

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

			Unpaid				Average
(in thousands)	Recorded		principal		Related		recorded
June 30, 2017	investment		balance		allowance		investment
Loans with no related allowance recorded:
Commercial and industrial	$	40	$	40	$	-	$	187
Construction and development, excluding undeveloped land		412		412		-		465
Undeveloped land		473		473		-		393
Real estate mortgage
Commercial investment		165		171		-		147