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Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

– The consolidated financial statements include the accounts of Stock Yards Bancorp, Inc. (“Holding Company”), and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”). All significant inter-company transactions and accounts have been eliminated in consolidation. All companies are collectively referred to as “Bancorp” or the “Company.”

The Bank, chartered in

1904,

is a Louisville, Kentucky-based, state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio Metropolitan Statistical Areas (“MSAs”) through

full service banking center locations.

As of

March 31, 2019,

Bancorp was divided into

two

reportable segments: Commercial banking and Wealth Management & Trust (“WM&T”):

Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses through commercial lending, retail lending, deposit services, treasury management services, private banking, online banking, mobile banking, merchant services, workplace banking, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a

third

party broker-dealer.

WM&T, with approximately

billion in assets under management, provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form

-Q and Rule

of Regulation S-

Accordingly, the financial statements do

not

include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the

three

months ended

March 31, 2019

are

not

necessarily indicative of the results that

may

be expected for the year ending

December

31,

2019.

For further information, refer to the consolidated financial statements and notes thereto included in Bancorp’s Annual Report on Form

-K for the year ended

December 31, 2018.

Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.

Significant Accounting Policies

- 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. A description of significant accounting policies is presented in Bancorp’s Annual Report on Form

-K for the year ended

December 31, 2018.

Critical

Accounting Policies

- An allowance has been established to provide for probable losses on loans that

may

not

be fully repaid. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries. Loans are typically charged off when management deems them uncollectible and after underlying collateral has been liquidated; however, collection efforts continue and future recoveries

may

occur. Periodically, loans are partially charged off to the net realizable value based upon evaluation of related underlying collateral, including Bancorp’s proclivity for resolution.

The allowance methodology is driven by risk ratings, historical losses, and qualitative factors. The level of the

March 31, 2019

allowance reflected a number of factors, including credit quality metrics which were generally consistent with prior periods, and expansion of the historical look-back period from

quarters to

quarters. This expansion of the historical period was applied to all classes and segments of the portfolio. Expansion of the look-back period for historical loss rates used in the quantitative allocation caused review of the overall methodology for qualitative factors to ensure we were appropriately capturing risk

not

addressed in the quantitative historical loss rate. Management believes extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. Based on the look-back period extension, the allowance level increased approximately

$2.0

million for the

first

three

months of

2019.

Key indicators of loan quality continued to trend at levels consistent with prior periods, however management recognizes that due to the cyclical nature of the lending business, these trends will likely normalize over the long term. Additional information regarding Bancorp’s methodology for evaluating the adequacy of the allowance can be read in Bancorp’s Annual Report on Form

10K.

Accounting Standards Updates (“ASUs”)

The following ASU was issued prior to

March 31, 2019

and is considered relevant to Bancorp’s financial statements. Generally, if an issued-but-

not

-yet-effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will

not

be re-disclosed.

June 2016,

the Financial Accounting Standards Board (“FASB”) issued ASU

2016

13,

Measurement of Credit Losses on Financial Instruments

, (“CECL”). This ASU significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. The guidance is effective for annual and interim reporting periods beginning after

December 15, 2019.

Bancorp expects to recognize a

one

-time cumulative-effect adjustment to the allowance on

January 1, 2020.

Interagency guidance issued in

December 2018

allows for a

three

year phase-in of the cumulative-effect adjustment for regulatory capital reporting.

As a result of this ASU, Bancorp could experience an increase in its allowance. Bancorp has formed a committee to oversee its transition to the CECL methodology. Bancorp has devoted internal resources and purchased a

third

party software solution to analyze, compute and report upon the CECL disclosure requirements. In addition, Bancorp has analyzed loan-level data and concluded upon its CECL loan segmentation and initial segment calculation methodologies. Bancorp is currently exploring regression techniques and has begun to run forecasting scenarios.

Recently adopted accounting standards

Bancorp adopted ASU

2016

02,

Leases

and related amendments using an alternative transition method, effective

January 1, 2019

and upon adoption recorded

$17

million of right-of-use lease assets and

$18

million of operating lease liabilities on its balance sheet as of

March 31, 2019.

Prior periods have

not

been restated. The right-of-use lease asset and operating lease liability are recorded in others assets and other liabilities, respectively, on the consolidated balance sheet. Bancorp elected all applicable practical expedients, including the option to expense short-term leases, which are defined as leases with a term of

one

year or less. Bancorp also elected

not

to separate lease components from non-lease components.

The adoption of this ASU did

not

have a meaningful impact on Bancorp's performance metrics, including regulatory capital ratios and return on average assets. Additionally, Bancorp does

not

believe that the adoption of this ASU by its clients will have a significant impact on Bancorp's ability to underwrite credit when client financial statements are presented inclusive of the requirements of this ASU. See the note titled “Leases” for additional information on lease activities.