Note 10 - Commitments and Contingent Liabilities

3 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

(10) Commitments and Contingent Liabilities

As of March 31, 2021 and December 31, 2020, Bancorp had various commitments outstanding that arose in the normal course of business which are properly not reflected in the consolidated financial statements. Total off-balance sheet commitments to extend credit follows:

(in thousands)	March 31, 2021		December 31, 2020
Commercial and industrial	$	585,289	$	555,077
Construction and development		292,996		266,550
Home equity		177,156		175,132
Credit cards		32,555		32,321
Overdrafts		32,917		33,564
Letters of credit		26,326		24,425
Other		51,935		54,385
Future loan commitments		201,487		249,318
Total off balance sheet commitments to extend credit	$	1,400,661	$	1,390,772

Commitments to extend credit are agreements to lend to customers either as unsecured or, in the case of secured, as long as collateral is available as agreed upon and there is no violation of any condition established in the contracts. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

At March 31, 2021 and December 31, 2020, Bancorp had accrued $5.1 million and $5.4 million, respectively, in other liabilities for its estimate of credit losses on off balance sheet credit exposures. A net benefit of $275,000 was recorded for the provision for off balance sheet credit exposures for the three months ended March 31, 2021, as compared to net expense of $375,000 for the same period of 2020. The reduction in the ACL for off balance sheet credit exposures between December 31, 2020 and March 31, 2021 is attributed to nearly all loan segments experiencing a decrease in their reserve loss percentages consistent with generally improving model factors, particularly unemployment forecasts.

Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.

Certain commercial customers require confirmation of Bancorp’s letters of credit by other banks since Bancorp does not have a rating by a national rating agency. Terms of the agreements range from one month to a year with certain agreements requiring between one and six months’ notice to cancel. If an event of default on all contracts had occurred at March 31, 2021, Bancorp would have been required to make payments of approximately $1.7 million, or the maximum amount payable under those contracts. No payments have ever been required because of default on these contracts. These agreements are normally secured by collateral acceptable to Bancorp, which limits credit risk associated with the agreements.

On April 9, 2021, a lawsuit was filed by a purported shareholder of Kentucky Bancshares, Inc. (“KBI”) in the Circuit Court of Bourbon County, Kentucky challenging our proposed merger with KBI.  The complaint, captioned Paul Parshall v. Kentucky Bancshares, Inc. et al. (Case No. 21-CI-00109), names as defendants KBI, the KBI board of directors, Stock Yards Bancorp, Inc. and H. Meyer Merger Subsidiary, Inc., a wholly-owned subsidiary of Stock Yards Bancorp (“Merger Sub”).  The complaint alleges, among other things, that the individual defendants breached their fiduciary duties as directors of KBI in connection with their consideration and approval of the proposed merger transaction and caused materially misleading and incomplete information regarding the proposed transaction to be disseminated to the KBI shareholders in violation of their fiduciary duty of disclosure.  The complaint further asserts that KBI, Stock Yards Bancorp and Merger Sub aided and abetted the alleged breaches of fiduciary duty by the directors of KBI in connection with the proposed transaction.  The complaint seeks, among other relief, preliminary and permanent injunctions preventing the defendants from proceeding with, consummating or closing the proposed transaction unless and until KBI provides all material information to KBI shareholders to allow them to make a fully informed voting or appraisal decision with respect to the proposed transaction and adopts and implements a procedure or process to obtain a merger agreement providing the best available terms for the KBI shareholders.  Stock Yards Bancorp, KBI and the KBI board of directors believe the claims asserted in the lawsuit are without merit. On April 28, 2021, Stock Yards Bancorp and Merger Sub, with the consent of the other defendants, filed a Notice of Removal with the U.S. District Court for the Eastern District of Kentucky, Central Division, to remove the case from Bourbon Circuit Court to the U.S. District Court (Case No. 5:21-CV-00108-REW) for all further proceedings. 

On April 30, 2021, a lawsuit was filed by a purported shareholder of KBI in the U.S. District Court for the Southern District of New York challenging our proposed merger with KBI.  The complaint, captioned Alex Ciccotelli v. Kentucky Bancshares, Inc. et al. (Case No. 1:21-CV-03865-LAP), names as defendants KBI, the KBI board of directors, Stock Yards Bancorp and Merger Sub.  The complaint alleges, among other things, that the individual defendants violated Section 14(a) of the Securities Exchange Act of 1934 (the “1934 Act”) and Rule 14a-9 promulgated thereunder by disseminating a proxy statement/prospectus to the shareholders of KBI in connection with the proposed transaction that contains material misstatements and omissions and that KBI is liable as the issuer of those statements.  The complaint further asserts that the individual defendants and Stock Yards Bancorp are liable for the alleged misstatements and omissions in the proxy statement/prospectus by virtue of their actions as controlling persons of KBI within the meaning of Section 20(a) of the 1934 Act.  The complaint seeks, among other relief, preliminary and permanent injunctions preventing the defendants from proceeding with, consummating or closing the proposed transaction, an order directing the individual defendants to disseminate a proxy statement/prospectus that does not contain any material misstatements or omissions and, in the event defendants consummate the proposed transaction, an award of rescissionary damages.  Stock Yards Bancorp, KBI and the KBI board of directors believe the claims asserted in the lawsuit are without merit.

As of March 31, 2021, in the normal course of business, there were other pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or results of operations of Bancorp.