Edgar Filing: Stock Yards Bancorp, Inc.

sybt20160201_10q.htm Table Of Contents

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 March 31, 2016

☐	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 or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting 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	☐

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 April 25, 2016, was 14,985,768.

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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 March 31, 2016 (Unaudited) and December 31, 2015	3

	Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2016 and 2015	5

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three months ended March 31, 2016 and 2015	6

	Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2016 and 2015	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	57

part II – other information

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 6.	Exhibits	58

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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

Dodd-Frank Act	Dodd-Frank Wall Street Reform and Consumer Protection Act

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

IM&T	Investment Management and Trust

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

TDR	Troubled Debt Restructuring

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

March 31, 2016 and December 31, 2015

(In thousands, except share data)

	March 31,		December 31,
Assets	2016		2015
	(Unaudited)
Cash and due from banks	$	35,022	$	35,895
Federal funds sold		13,016		67,938
Cash and cash equivalents		48,038		103,833
Mortgage loans held for sale		3,984		6,800
Securities available-for-sale (amortized cost of $561,906 in 2016 and $564,391 in 2015)		569,012		565,876
Federal Home Loan Bank stock and other securities		6,347		6,347
Loans		2,094,488		2,033,007
Less allowance for loan losses		22,451		22,441
Net loans		2,072,037		2,010,566
Premises and equipment, net		39,975		39,557
Bank owned life insurance		31,217		30,996
Accrued interest receivable		7,146		6,610
Other assets		46,351		46,216
Total assets	$	2,824,107	$	2,816,801
Liabilities and Stockholders’ Equity
Deposits:
Non-interest bearing	$	606,375	$	583,768
Interest bearing		1,759,725		1,787,934
Total deposits		2,366,100		2,371,702
Securities sold under agreements to repurchase		54,781		64,526
Federal funds purchased		30,083		22,477
Accrued interest payable		119		127
Other liabilities		33,465		27,982
Federal Home Loan Bank advances		43,236		43,468
Total liabilities		2,527,784		2,530,282
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 14,985,129 and 14,919,351 shares in 2016 and 2015, respectively		10,835		10,616
Additional paid-in capital		45,733		44,180
Retained earnings		235,809		231,091
Accumulated other comprehensive income		3,946		632
Total stockholders’ equity		296,323		286,519
Total liabilities and stockholders’ equity	$	2,824,107	$	2,816,801

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Income

For the three months ended March 31, 2016 and 2015 (Unaudited)

(In thousands, except per share data)

	2016		2015
Interest income:
Loans	$	21,993	$	20,415
Federal funds sold		189		68
Mortgage loans held for sale		60		39
Securities – taxable		2,155		2,034
Securities – tax-exempt		303		291
Total interest income		24,700		22,847
Interest expense:
Deposits		996		973
Federal funds purchased		15		7
Securities sold under agreements to repurchase		33		37
Federal Home Loan Bank advances		187		216
Total interest expense		1,231		1,233
Net interest income		23,469		21,614
Provision for loan losses		500		—
Net interest income after provision for loan losses		22,969		21,614
Non-interest income:
Investment management and trust revenue		4,612		4,552
Service charges on deposit accounts		2,146		2,080
Bankcard transaction revenue		1,310		1,122
Mortgage banking revenue		794		828
Brokerage commissions and fees		443		461
Bank owned life insurance income		221		222
Other		556		408
Total non-interest income		10,082		9,673
Non-interest expenses:
Salaries and employee benefits		12,195		11,100
Net occupancy expense		1,524		1,469
Data processing expense		1,544		1,454
Furniture and equipment expense		285		247
FDIC insurance expense		328		297
Amortization of investment in tax credit partnerships		1,015		158
Other		2,649		3,054
Total non-interest expenses		19,540		17,779
Income before income taxes		13,511		13,508
Income tax expense		3,676		4,253
Net income	$	9,835	$	9,255
Net income per share:
Basic	$	0.66	$	0.63
Diluted	$	0.65	$	0.62
Average common shares:
Basic		14,836		14,647
Diluted		15,061		14,852

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

For the three months ended March 31, 2016 and 2015 (Unaudited)

(In thousands)

	2016			2015
Net income	$	9,835		$	9,255
Other comprehensive income, net of tax:
Unrealized gains on securities available-for-sale:
Unrealized gains arising during the period (net of tax of $1,968 and $1,011, respectively)		3,653			1,880
Unrealized (losses) gains on hedging instruments:
Unrealized (losses) gains arising during the period (net of tax of ($183) and ($9), respectively)		(339	)		(19	)

Other comprehensive income		3,314			1,861
Comprehensive income	$	13,149		$	11,116

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

For the three months ended March 31, 2016 and 2015 (Unaudited)

(In thousands, except per share data)

	Common stock						Additional						Accumulated other
	Number of shares			Amount			paid-in capital			Retained earnings			comprehensive income		Total
Balance December 31, 2014		14,745		$	10,035		$	38,191		$	209,584		$	2,085	$	259,895

Net income		—			—			—			9,255			—		9,255

Other comprehensive income, net of tax		—			—			—			—			1,861		1,861

Stock compensation expense		—			—			501			—			—		501

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		66			219			1,112			(1,346	)		—		(15	)

Cash dividends, $0.23 per share		—			—			—			(3,393	)		—		(3,393	)

Shares repurchased or cancelled		(16	)		(51	)		(452	)		—			—		(503	)

Balance March 31, 2015		14,795		$	10,203		$	39,352		$	214,100		$	3,946	$	267,601

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

Net income		—			—			—			9,835			—		9,835

Other comprehensive income, net of tax		—			—			—			—			3,314		3,314

Stock compensation expense		—			—			513			—			—		513

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		70			232			1,146			(1,499	)		—		(121	)

Cash dividends, $0.25 per share		—			—			—			(3,737	)		—		(3,737	)

Shares repurchased or cancelled		(4	)		(13	)		(106	)		119			—		—

Balance March 31, 2016		14,985		$	10,835		$	45,733		$	235,809		$	3,946	$	296,323

See accompanying notes to unaudited consolidated financial statements.

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STOCK YARDS BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the three months ended March 31, 2016 and 2015 (Unaudited)

(In thousands)

	2016			2015
Operating activities:
Net income	$	9,835		$	9,255
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		500			—
Depreciation, amortization and accretion, net		2,662			1,672
Deferred income tax provision		1,179			1,090
Gain on sales of mortgage loans held for sale		(462	)		(560	)
Origination of mortgage loans held for sale		(20,788	)		(27,100	)
Proceeds from sale of mortgage loans held for sale		24,066			24,926
Bank owned life insurance income		(221	)		(222	)
Loss on the disposal of premises and equipment		-			9
(Gain) loss on the sale of other real estate		(333	)		20
Stock compensation expense		513			501
Excess tax benefits from share-based compensation arrangements		(404	)		(154	)
(Increase) decrease in accrued interest receivable and other assets		(4,774	)		237
Increase (decrease) in accrued interest payable and other liabilities		5,871			(3,036	)
Net cash provided by operating activities		17,644			6,638
Investing activities:
Purchases of securities available-for-sale		(117,915	)		(70,664	)
Proceeds from sale of securities available for sale		-			5,934
Proceeds from maturities of securities available-for-sale		119,615			108,502
Net increase in loans		(62,660	)		(5,644	)
Purchases of premises and equipment		(1,169	)		(1,728	)
Proceeds from sale of other real estate		513			272
Net cash (used in) provided by investing activities		(61,616	)		36,672
Financing activities:
Net decrease in deposits		(5,602	)		(13,398	)
Net decrease in securities sold under agreements to repurchase and federal funds purchased		(2,139	)		(42,635	)
Proceeds from Federal Home Loan Bank advances		30,000			10,000
Repayments of Federal Home Loan Bank advances		(30,232	)		(10,088	)
Issuance of common stock for options and performance stock units		495			167
Excess tax benefits from share-based compensation arrangements		404			154
Common stock repurchases		(1,020	)		(839	)
Cash dividends paid		(3,729	)		(3,393	)
Net cash used in financing activities		(11,823	)		(60,032	)
Net decrease in cash and cash equivalents		(55,795	)		(16,722	)
Cash and cash equivalents at beginning of period		103,833			74,241
Cash and cash equivalents at end of period	$	48,038		$	57,519
Supplemental cash flow information:
Income tax payments		-			1
Cash paid for interest		1,239			1,237
Supplemental non-cash activity:
Transfers from loans to other real estate owned	$	689		$	146

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 the 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 intercompany 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 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. Material estimates that are particularly susceptible to significant change relate to the 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, 2015 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 month period ended March 31, 2016 are not necessarily indicative of the results for the entire year.

Critical Accounting Policies

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 the 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 reflects an allowance methodology that is driven by risk ratings, historical losses, 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 second quarter of 2015, Bancorp extended the historical period used to capture Bancorp’s historical loss ratios from 12 quarters to 24 quarters. 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, the 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 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 the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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Stock Yards Bancorp, inc. and subsidiary

Bancorp’s allowance calculation includes allocations to loan portfolio segments at March 31, 2016 for qualitative factors including, among other factors, economic and business conditions in each of our primary markets, the 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, dependency upon the value of underlying collateral for collateral-dependent loans, effect of other external factors such as the national economic and business trends, and the quality and depth of the loan review function. 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 the criteria used in this evaluation or the 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 and lease 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
March 31, 2016	cost		Gains		Losses		value

Government sponsored enterprise obligations	$	333,470	$	3,608	$	162	$	336,916

Mortgage-backed securities - government agencies		166,933		2,601		423		169,111
Obligations of states and political subdivisions		60,850		1,512		26		62,336
Corporate equity securities		653		-		4		649

Total securities available for sale	$	561,906	$	7,721	$	615	$	569,012

December 31, 2015

U.S. Treasury and other U.S. Government obligations	$	79,999	$	1	$	-	$	80,000
Government sponsored enterprise obligations		251,190		1,468		765		251,893

Mortgage-backed securities - government agencies		170,139		1,143		1,654		169,628
Obligations of states and political subdivisions		62,410		1,342		50		63,702
Corporate equity securities		653		-		-		653

Total securities available for sale	$	564,391	$	3,954	$	2,469	$	565,876

Corporate equity securities, included in the available-for-sale portfolio at March 31, 2016 and December 31, 2015, consisted of common stock in a publicly-traded small business investment company.

There were no securities classified as held to maturity as of March 31, 2016 or December 31, 2015.

No securities were sold in the first three months of 2016. In the first three months of 2015, Bancorp sold securities with total fair market value of $5.9 million, generating no gain or loss. These securities consisted of mortgage-backed securities with small remaining balances and agency securities. These sales were made in the ordinary course of portfolio management. Management has the intent and ability to hold all remaining investment securities available-for-sale for the foreseeable future.

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Stock Yards Bancorp, inc. and subsidiary

A summary of the available-for-sale investment securities by maturity groupings as of March 31, 2016 is shown below.

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

Due within 1 year	$	115,644	$	115,721
Due after 1 but within 5 years		139,936		141,921
Due after 5 but within 10 years		23,300		23,675
Due after 10 years		115,440		117,935
Mortgage-backed securities		166,933		169,111
Corporate equity securities		653		649
Total securities available-for-sale	$	561,906	$	569,012

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 the underlying collateral.

Securities with a carrying value of approximately $337.8 million at March 31, 2016 and $380.7 million at December 31, 2015 were pledged to secure accounts of commercial depositors in cash management accounts, public deposits, and cash balances for certain investment management and trust accounts.

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Stock Yards Bancorp, inc. and subsidiary

Securities with unrealized losses not recognized in the statements of income are as follows:

(in thousands)	Less than 12 months				12 months or more				Total
March 31, 2016	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses

Government sponsored enterprise obligations	$	141,052	$	90	$	7,848	$	72	$	148,900	$	162
Mortgage-backed securities - government agencies		7,917		31		28,823		392		36,740		423
Obligations of states and political subdivisions		5,054		15		1,339		11		6,393		26
Corporate equity securities		649		4		-		-		649		4

Total temporarily impaired securities	$	154,672	$	140	$	38,010	$	475	$	192,682	$	615

December 31, 2015
Government sponsored enterprise obligations	$	102,098	$	500	$	8,469	$	265	$	110,567	$	765
Mortgage-backed securities - government agencies		49,774		662		29,936		992		79,710		1,654
Obligations of states and political subdivisions		13,225		31		1,955		19		15,180		50

Total temporarily impaired securities	$	165,097	$	1,193	$	40,360	$	1,276	$	205,457	$	2,469

Applicable dates for determining when securities are in an unrealized loss position are March 31, 2016 and December 31, 2015. 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. These investments consist of 37 and 70 separate investment positions as of March 31, 2016 and December 31, 2015, respectively. 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 March 31, 2016.

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)	March 31, 2016		December 31, 2015
Commercial and industrial	$	676,782	$	644,398
Construction and development, excluding undeveloped land		139,148		134,482
Undeveloped land		21,519		21,185

Real estate mortgage:
Commercial investment		496,647		482,639
Owner occupied commercial		372,811		375,016
1-4 family residential		234,199		226,575
Home equity - first lien		52,042		50,115
Home equity - junior lien		63,336		63,066
Subtotal: Real estate mortgage		1,219,035		1,197,411

Consumer		38,004		35,531

Total loans	$	2,094,488	$	2,033,007

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Stock Yards Bancorp, inc. and subsidiary

The following table presents the balance in the recorded investment in loans and allowance for loan losses by portfolio segment and based on impairment evaluation method as of March 31, 2016 and December 31, 2015.

(in thousands)	Type of loan
March 31, 2016	Commercial and industrial		Construction and development excluding undeveloped land		Undeveloped land		Real estate mortgage		Consumer		Total

Loans	$	676,782	$	139,148	$	21,519	$	1,219,035	$	38,004	$	2,094,488

Loans collectively evaluated for impairment	$	672,059	$	138,827	$	21,519	$	1,214,376	$	37,906	$	2,084,687

Loans individually evaluated for impairment	$	4,647	$	-	$	-	$	4,173	$	98	$	8,918

Loans acquired with deteriorated credit quality	$	76	$	321	$	-	$	486	$	-	$	883

	Commercial and industrial			Construction and development excluding undeveloped land		Undeveloped land		Real estate mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2015	$	8,645		$	1,760	$	814	$	10,875		$	347		$	22,441
Provision (credit)		813			159		94		(578	)		12			500
Charge-offs		(348	)		-		-		(203	)		(117	)		(668	)
Recoveries		32			10		-		20			116			178
At March 31, 2016	$	9,142		$	1,929	$	908	$	10,114		$	358		$	22,451

Allowance for loans collectively evaluated for impairment	$	8,760		$	1,929	$	908	$	9,814		$	292		$	21,703

Allowance for loans individually evaluated for impairment	$	382		$	-	$	-	$	300		$	66		$	748

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

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Stock Yards Bancorp, inc. and subsidiary

(in thousands)	Type of loan
December 31, 2015	Commercial and industrial		Construction and development excluding undeveloped land		Undeveloped land		Real estate mortgage		Consumer		Total

Loans	$	644,398	$	134,482	$	21,185	$	1,197,411	$	35,531	$	2,033,007

Loans collectively evaluated for impairment	$	639,760	$	134,160	$	21,185	$	1,192,864	$	35,463	$	2,023,432

Loans individually evaluated for impairment	$	4,635	$	-	$	-	$	4,050	$	68	$	8,753

Loans acquired with deteriorated credit quality	$	3	$	322	$	-	$	497	$	-	$	822

	Commercial and industrial			Construction and development excluding undeveloped land			Undeveloped land			Real estate mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2014	$	11,819		$	721		$	1,545		$	10,541		$	294		$	24,920
Provision (credit)		793			1,065			(2,131	)		872			151			750
Charge-offs		(4,065	)		(26	)		-			(693	)		(597	)		(5,381	)
Recoveries		98			-			1,400			155			499			2,152
At December 31, 2015	$	8,645		$	1,760		$	814		$	10,875		$	347		$	22,441

Allowance for loans collectively evaluated for impairment	$	8,377		$	1,760		$	814		$	10,667		$	279		$	21,897

Allowance for loans individually evaluated for impairment	$	268		$	-		$	-		$	208		$	68		$	544

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

The considerations by Bancorp in computing its allowance for loan losses are determined based on the 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 the 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 the 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 initially acquired for development by the borrower, but for which no development has yet taken place. Credit risk is affected by market conditions and time to sell lots at an adequate price. Credit risk is also affected by availability of permanent financing, to the extent such permanent 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 area. Cash flows of income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will 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 and stock prices, will have a significant effect on credit quality in this loan category.

Bancorp has loans that were acquired in a 2013 acquisition, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, 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 March 31, 2016 and December 31, 2015. 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, 2014	$	62		$	266

Accretion		(59	)		(77	)
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at December 31, 2015	$	3		$	189

Accretion		(3	)		-
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at March 31, 2016	$	-		$	189

Accretion in the non-accretable discount column represents accretion recorded upon payoff of loans.

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Stock Yards Bancorp, inc. and subsidiary

The following table presents loans individually evaluated for impairment.

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

Loans with no related allowance recorded:
Commercial and industrial	$	3,544	$	4,581	$	-	$	3,332
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		204		204		-		241
Owner occupied commercial		1,693		2,132		-		1,718
1-4 family residential		1,115		1,115		-		1,011
Home equity - first lien		-		-		-		7
Home equity - junior lien		289		289		-		191
Subtotal: Real estate mortgage		3,301		3,740		-		3,168

Consumer		32		32		-		16
Subtotal	$	6,877	$	8,353	$	-	$	6,516

Loans with an allowance recorded:
Commercial and industrial	$	1,103	$	1,578	$	382	$	1,310
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		-		-		-		-
Owner occupied commercial		872		872		300		945
1-4 family residential		-		-		-		-
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		872		872		300		945

Consumer		66		66		66		67
Subtotal	$	2,041	$	2,516	$	748	$	2,322

Total:
Commercial and industrial	$	4,647	$	6,159	$	382	$	4,642
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		-

Real estate mortgage		-		-		-		-
Commercial investment		204		204		-		241
Owner occupied commercial		2,565		3,004		300		2,663
1-4 family residential		1,115		1,115		-		1,011
Home equity - first lien		-		-		-		7
Home equity - junior lien		289		289		-		191
Subtotal: Real estate mortgage		4,173		4,612		300		4,113

Consumer		98		98		66		83
Total	$	8,918	$	10,869	$	748	$	8,838

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Stock Yards Bancorp, inc. and subsidiary

(in thousands)			Unpaid				Average
	Recorded		principal		Related		recorded
December 31, 2015	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	3,119	$	3,859	$	-	$	1,414
Construction and development, excluding undeveloped land		-		151		-		21
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		278		278		-		178
Owner occupied commercial		1,743		2,713		-		1,622
1-4 family residential		906		906		-		661
Home equity - first lien		13		13		-		37
Home equity - junior lien		92		92		-		69
Subtotal: Real estate mortgage		3,032		4,002		-		2,567

Consumer		-		-		-		3
Subtotal	$	6,151	$	8,012	$	-	$	4,005

Loans with an allowance recorded:
Commercial and industrial	$	1,516	$	3,087	$	268	$	4,612
Construction and development, excluding undeveloped land		-		-		-		368
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		-		-		-		92
Owner occupied commercial		1,018		1,018		208		1,266
1-4 family residential		-		-		-		188
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		1,018		1,018		208		1,546

Consumer		68		68		68		72
Subtotal	$	2,602	$	4,173	$	544	$	6,598

Total:
Commercial and industrial	$	4,635	$	6,946	$	268	$	6,026
Construction and development, excluding undeveloped land		-		151		-		389
Undeveloped land		-		-		-		-

Real estate mortgage		-		-		-		-
Commercial investment		278		278		-		270
Owner occupied commercial		2,761		3,731		208		2,888
1-4 family residential		906		906		-		849
Home equity - first lien		13		13		-		37
Home equity - junior lien		92		92		-		69
Subtotal: Real estate mortgage		4,050		5,020		208		4,113

Consumer		68		68		68		75
Total	$	8,753	$	12,185	$	544	$	10,603

Differences between recorded investment amounts and unpaid principal balance amounts less related allowance are due to partial charge-offs which have occurred over the life of loans and fair value adjustments recorded for loans acquired.

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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 (TDR), 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 did not have any loans past due more than 90 days and still accruing interest, compared to $176 thousand at December 31, 2015.

The following table presents the recorded investment in non-accrual loans as of March 31, 2016 and December 31, 2015.

(in thousands)	March 31, 2016		December 31, 2015

Commercial and industrial	$	3,673	$	3,643
Construction and development, excluding undeveloped land		-		-
Undeveloped land		-		-

Real estate mortgage
Commercial investment		204		278
Owner occupied commercial		2,565		2,761
1-4 family residential		1,115		906
Home equity - first lien		-		13
Home equity - junior lien		289		92
Subtotal: Real estate mortgage		4,173		4,050

Consumer		32		-

Total	$	7,878	$	7,693

At March 31, 2016 and December 31, 2015, Bancorp had $1.0 million and $1.1 million of accruing loans classified as TDR, respectively. Bancorp did not modify and classify any additional loans as TDR during the three months ended March 31, 2016 or 2015.

Bancorp did not have any loans accounted for as TDR that were restructured and experienced a subsequent payment default during the three and twelve month periods ended March 31, 2016 or 2015. Loans accounted for as TDR 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 TDR, which have not defaulted, are individually evaluated for impairment and, at March 31, 2016, had a total allowance allocation of $330 thousand, compared to $177 thousand at December 31, 2015.

At March 31, 2016 and December 31, 2015, Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDR.

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Stock Yards Bancorp, inc. and subsidiary

The following table presents the aging of the recorded investment in loans as of March 31, 2016 and December 31, 2015.

					90 or more								Recorded
(in thousands)					days past								investment
					due								> 90 days
	30-59 days		60-89 days		(includes)		Total				Total		and
March 31, 2016	past due		past due		non-accrual)		past due		Current		loans		accruing

Commercial and industrial	$	654	$	37	$	3,673	$	4,364	$	672,418	$	676,782	$	-
Construction and development, excluding undeveloped land		-		-		-		-		139,148		139,148		-
Undeveloped land		1,859		-		-		1,859		19,660		21,519		-

Real estate mortgage
Commercial investment		315		278		204		797		495,850		496,647		-
Owner occupied commercial		1,495		95		2,565		4,155		368,656		372,811		-
1-4 family residential		626		193		1,115		1,934		232,265		234,199		-
Home equity - first lien		-		-		-		-		52,042		52,042		-
Home equity - junior lien		129		120		289		538		62,798		63,336		-
Subtotal: Real estate mortgage		2,565		686		4,173		7,424		1,211,611		1,219,035		-

Consumer		224		5		32		261		37,743		38,004		-

Total	$	5,302	$	728	$	7,878	$	13,908	$	2,080,580	$	2,094,488	$	-

December 31, 2015

Commercial and industrial	$	238	$	327	$	3,643	$	4,208	$	640,190	$	644,398	$	-
Construction and development, excluding undeveloped land		-		-		-		-		134,482		134,482		-
Undeveloped land		-		-		-		-		21,185		21,185		-

Real estate mortgage
Commercial investment		290		140		278		708		481,931		482,639		-
Owner occupied commercial		-		-		2,761		2,761		372,255		375,016		-
1-4 family residential		1,147		94		1,082		2,323		224,252		226,575		176
Home equity - first lien		35		51		13		99		50,016		50,115		-
Home equity - junior lien		285		173		92		550		62,516		63,066		-
Subtotal: Real estate mortgage		1,757		458		4,226		6,441		1,190,970		1,197,411		176

Consumer		343		8		-		351		35,180		35,531		-

Total	$	2,338	$	793	$	7,869	$	11,000	$	2,022,007	$	2,033,007	$	176

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Stock Yards Bancorp, inc. and subsidiary

Consistent with regulatory guidance, Bancorp categorizes loans into credit risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans included all risk-rated loans other than those classified as other assets especially mentioned, substandard, and doubtful, which are defined below:

●

Other assets especially mentioned (“OAEM”): Loans classified as OAEM have potential weaknesses that deserve management's close attention. These potential weaknesses may result in deterioration of repayment prospects for the loan or of Bancorp's credit position at some future date.

●

Substandard: Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize repayment of the debt. Default is a distinct possibility if the deficiencies are not corrected.

●

Substandard non-performing: Loans classified as substandard non-performing have all the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as troubled debt restructurings. Loans are placed on non-accrual status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more.

●

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

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Stock Yards Bancorp, inc. and subsidiary

As of March 31, 2016 and December 31, 2015, the internally assigned risk grades of loans by category were as follows:

(in thousands)							Substandard				Total
March 31, 2016	Pass		OAEM		Substandard		non-performing		Doubtful		loans

Commercial and industrial	$	642,042	$	22,907	$	7,186	$	4,647	$	-	$	676,782
Construction and development, excluding undeveloped land		137,924		-		1,224		-		-		139,148
Undeveloped land		20,854		-		665		-		-		21,519

Real estate mortgage
Commercial investment		494,426		1,950		67		204		-		496,647
Owner occupied commercial		354,090		12,591		3,565		2,565		-		372,811
1-4 family residential		232,502		582		-		1,115		-		234,199
Home equity - first lien		52,042		-		-		-		-		52,042
Home equity - junior lien		62,997		50		-		289		-		63,336
Subtotal: Real estate mortgage		1,196,057		15,173		3,632		4,173		-		1,219,035

Consumer		37,906		-		-		98		-		38,004

Total	$	2,034,783	$	38,080	$	12,707	$	8,918	$	-	$	2,094,488


December 31, 2015

Commercial and industrial	$	612,853	$	19,672	$	7,238	$	4,635	$	-	$	644,398
Construction and development, excluding undeveloped land		133,342		773		367		-		-		134,482
Undeveloped land		20,513		517		155		-		-		21,185

Real estate mortgage
Commercial investment		480,178		2,183		-		278		-		482,639
Owner occupied commercial		351,707		17,135		3,413		2,761		-		375,016
1-4 family residential		224,645		848		-		1,082		-		226,575
Home equity - first lien		50,102		-		-		13		-		50,115
Home equity - junior lien		62,924		50		-		92		-		63,066
Subtotal: Real estate mortgage		1,169,556		20,216		3,413		4,226		-		1,197,411

Consumer		35,463		-		-		68		-		35,531

Total	$	1,971,727	$	41,178	$	11,173	$	8,929	$	-	$	2,033,007

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Stock Yards Bancorp, inc. and subsidiary

(4)

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase, which represent excess funds from commercial customers as part of a cash management service, totaled $54.8 million and $64.5 million at March 31, 2016 and December 31, 2015, respectively. Bancorp enters into sales of securities under agreement to repurchase at a specified future date. At March 31, 2016, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities which were owned and under the control of Bancorp.

(5)

Federal Home Loan Bank Advances

Bancorp had outstanding borrowings of $43.2 million and $43.5 million at March 31, 2016 and December 31, 2015, respectively, via 12 separate fixed-rate advances. For two advances totaling $30 million, both of which are non-callable, interest payments are due monthly, with principal due at maturity. For the remaining advances totaling $13.2 million, principal and interest payments are due monthly based on an amortization schedule.

The following is a summary of the contractual maturities and average effective rates of outstanding advances:

(In thousands)	March 31, 2016					December 31, 2015
Year	Advance		Fixed Rate			Advance		Fixed Rate
2016	$	30,000		0.59	%	$	30,000		0.55	%
2020		1,826		2.23			1,838		2.23
2021		411		2.12			429		2.12
2024		2,815		2.36			2,865		2.36
2025		6,849		2.44			6,991		2.44
2028		1,335		1.48			1,345		1.48

Total	$	43,236		1.11	%	$	43,468		1.09	%

Advances from the FHLB are collateralized by certain commercial and residential real estate mortgage loans totaling $557.1 million under a blanket mortgage collateral agreement and FHLB stock. Bancorp believes these borrowings to be an effective alternative to higher cost time deposits to manage interest rate risk associated with long-term fixed rate loans. At March 31, 2016, the amount of available credit from the FHLB totaled $355.6 million.

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Stock Yards Bancorp, inc. and subsidiary

(6)

Other Comprehensive Income (Loss)

The following table illustrates activity within the balances in accumulated other comprehensive income (loss) by component, and is shown for the three months ended March 31, 2016 and 2015.

	Net unrealized		Net unrealized			Minimum
	gains on		gains (losses)			pension
	securities		on cash			liability
(in thousands)	available-for-sale		flow hedges			adjustment			Total

Balance at December 31, 2014	$	2,456	$	16		$	(387	)	$	2,085

Other comprehensive income (loss)		1,880		(19	)		-			1,861
Net current period other comprehensive income (loss)		1,880		(19	)		-			1,861
Balance at March 31, 2015	$	4,336	$	(3	)	$	(387	)	$	3,946


Balance at December 31, 2015	$	965	$	(60	)	$	(273	)	$	632

Other comprehensive income (loss)		3,653		(339	)		-			3,314
Net current period other comprehensive income (loss)		3,653		(339	)		-			3,314
Balance at March 31, 2016	$	4,618	$	(399	)	$	(273	)	$	3,946

(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 three 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.

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Stock Yards Bancorp, inc. and subsidiary

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

(dollar amounts in thousands)	Receiving						Paying
	March 31,			December 31,			March 31,		December 31,
	2016			2015			2016		2015
Notional amount	$	20,560		$	10,788		$	20,560	$	10,788
Weighted average maturity (years)		6.8			6.9			6.8		6.9
Fair value	$	(944	)	$	(461	)	$	944	$	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 March 31, 2016 and December 31, 2015.

(dollars in thousands)
							Fair value			Fair value
Notional		Maturity	Receive (variable)	Pay fixed			March 31,			December 31,
amount		date	index	swap rate			2016			2015
$	10,000	12/6/2016	US 3 Month LIBOR		0.72	%	$	(1	)	$	8
	20,000	12/6/2020	US 3 Month LIBOR		1.79	%		(614	)		(101	)
$	30,000				1.43	%	$	(615	)	$	(93	)

(8)

Goodwill and Intangible Assets

US GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Annual evaluations have resulted in no indication of impairment. Bancorp currently has goodwill in the amount of $682 thousand from the 1996 acquisition of an Indiana bank. This goodwill is assigned to the commercial banking segment of Bancorp.

In 2013, Bancorp completed the acquisition of THE BANCorp, Inc., parent company of THE BANK – Oldham County, Inc. As a result, Bancorp recorded a core deposit intangible totaling $2.5 million which is being amortized over the expected life of the underlying deposits to which the intangible is attributable. For money market, savings and interest bearing checking accounts, this intangible asset is being amortized using a straight line method over 15 years. For the remainder of deposits, it is being amortized over a 10-year period using an accelerated method which anticipates the life of the underlying deposits. At March 31, 2016, the unamortized core deposit intangible was $1.5 million.

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Stock Yards Bancorp, inc. and subsidiary

Mortgage servicing rights (MSRs) are initially recognized at fair value when mortgage loans are sold with servicing retained. The MSRs are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. MSRs are evaluated quarterly for impairment by comparing carrying value to fair value. Estimated fair values of MSRs at March 31, 2016 and December 31, 2015 were $2.7 million and $3.1 million, respectively. Total outstanding principal balances of loans serviced for others were $402.3 million and $410.8 million at March 31, 2016, and December 31, 2015, respectively.

Changes in the net carrying amount of MSRs are shown in the following table:

	For three months
	ended March 31,
(in thousands)	2016			2015
Balance at beginning of period	$	1,018		$	1,131
Additions for mortgage loans sold		29			116
Amortization		(58	)		(180	)
Balance at March 31	$	989		$	1,067

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Defined Benefit Retirement Plan

Bancorp sponsors an unfunded, non-qualified, defined benefit retirement plan for three key officers (two current and one retired), and has no plans to increase the number of or benefits to participants. Benefits vest based on 25 years of service. The retired officer and one current officer are fully vested, and one current officer will be fully vested in 2017. Actuarially determined pension costs are expensed and accrued over the service period, and benefits are paid from Bancorp’s assets. Net periodic benefits costs, which include interest cost and amortization of net losses, totaled $33 thousand and $36 thousand, for the three months ended March 31, 2016 and 2015, respectively.

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Commitments and Contingent Liabilities

As of March 31, 2016, Bancorp had various commitments outstanding that arose in the normal course of business, including standby letters of credit and commitments to extend credit, which are properly not reflected in the consolidated financial statements. In management’s opinion, commitments to extend credit of $613.8 million including standby letters of credit of $13.4 million represent normal banking transactions. Commitments to extend credit were $636.9 million, including letters of credit of $12.8 million, as of December 31, 2015. Commitments to extend credit are agreements to lend to a customer as long as collateral is available and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Commitments to extend credit are mainly comprised of commercial lines of credit, construction and home equity credit lines and credit cards issued to commercial customers. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily 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, 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, 2016, Bancorp has accrued $387 thousand in other liabilities for inherent risks related to unfunded credit commitments.

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Stock Yards Bancorp, inc. and subsidiary

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

Also, as of March 31, 2016, in the normal course of business, there were 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.

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Preferred Stock

Bancorp has a class of preferred stock (no par value; 1,000,000 shares authorized), the relative rights, preferences and other terms of which or any series within the class will be determined by the Board of Directors prior to any issuance. None of this stock has been issued to date.

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Stock-Based Compensation

The fair value of all awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.

Bancorp currently has one stock-based compensation plan. At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. No additional shares were made available. As of March 31, 2016, there were 226,608 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015; however, options and SARs granted under this plan expire as late as 2025.

Options, which have not been granted since 2007, generally had a vesting schedule of 20% per year. Stock appreciation rights (“SARs”) granted have a vesting schedule of 20% per year. Options and SARs expire ten years after the grant date unless forfeited due to employment termination.

Restricted shares granted to officers vest over five years. All restricted shares have been granted at a price equal to the market value of common stock at the time of grant. For all grants prior to 2015, grantees are entitled to dividend payments during the vesting period. For grants in 2015 and 2016, forfeitable dividends are deferred until shares are vested. Fair value of restricted shares is equal to the market value of the shares on the date of grant.

Grants of performance stock units (“PSUs”) vest based upon service and a single three-year performance period which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the fair value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Beginning in 2015, grants require a one year post-vesting holding periods. For 2015 and 2016, the fair value of such grants incorporates a liquidity discount of 4.80% and 4.50%, respectively, related to the holding period.

Grants of restricted stock units (“RSUs”) to directors are time-based and vest 12 months after grant date. Because grantees are entitled to deferred dividend payments at the end of the vesting period, fair value of the RSUs is estimated based on fair value of underlying shares on the date of grant.

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Stock Yards Bancorp, inc. and subsidiary

Bancorp has recognized stock-based compensation expense, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows:

	For three months ended
	March 31,
(in thousands)	2016			2015

Stock-based compensation expense before income taxes	$	513		$	501
Less: deferred tax benefit		(180	)		(176	)
Reduction of net income	$	333		$	325

Bancorp expects to record an additional $1.7 million of stock-based compensation expense in 2016 for equity grants outstanding as of March 31, 2016. As of March 31, 2016, Bancorp has $5.4 million of unrecognized stock-based compensation expense that is expected to be recorded as compensation expense over the next five years as awards vest. Bancorp received cash of $495 thousand and $167 thousand from the exercise of options during the first three months of 2016 and 2015, respectively.

Fair values of Bancorp’s stock options and SARs are estimated at the date of grant using the Black-Scholes option pricing model, a leading formula for calculating the value of stock options and SARs. This model requires the input of assumptions, changes to which can materially affect the fair value estimate. Fair value of restricted shares is determined by Bancorp’s closing stock price on the date of grant. The following assumptions were used in SAR valuations at the grant date in each year:

	2016			2015

Dividend yield		2.94	%		2.97	%
Expected volatility		19.31	%		22.81	%
Risk free interest rate		1.70	%		1.91	%
Expected life of SARs (years)		7.3			7.5

Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of options and SARs granted. Expected volatility is the volatility of the underlying shares for the expected term on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the options. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.

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Stock Yards Bancorp, inc. and subsidiary

A summary of stock option and SAR activity and related information for the three months ended March 31, 2016 follows:

												Weighted
						Weighted		Aggregate		Weighted		average
	Options					average		intrinsic		average		remaining
	and SARs			Exercise		exercise		value		fair		contractual
	(in thousands)			price		price		(in thousands)		value		life (in years)

At December 31, 2015
Vested and exercisable		437		$	21.03-29.16	$	23.62	$	6,191	$	5.09		3.7
Unvested		177			22.86-36.83		27.99		1,733		4.93		7.7
Total outstanding		614			21.03-36.83		24.88		7,924		5.04		4.8


Granted		58			38.63		38.63		-		5.33
Exercised		(26	)		24.07-26.83		26.14		293		6.06
Forfeited		-			-		-		-		-

At March 31, 2016
Vested and exercisable		472			21.03-34.43		23.81		6,952		4.99		4.0
Unvested		174			22.86-38.63		32.21		1,105		5.15		8.5
Total outstanding		646			21.03-38.63		26.07	$	8,057		5.03		5.2

Vested year-to-date		61			22.86-34.43		26.14	$	753		4.70

Intrinsic value for stock options and SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grant price. The aggregate intrinsic value of stock options and SARs exercised was calculated as the difference in the closing price of Bancorp’s common shares on the date of exercise and the exercise price, multiplied by the number of shares exercised.

For the periods ending December 31, 2015 and March 31, 2016, Bancorp granted shares of restricted common stock as outlined in the following table:

				Grant date
				weighted-
	Number			average cost
Unvested at December 31, 2014		114,093		$	24.95
Shares awarded		35,265			34.48
Restrictions lapsed and shares released to employees		(40,510	)		23.84
Shares forfeited		(4,649	)		28.46
Unvested at December 31, 2015		104,199		$	28.46
Shares awarded		33,630			38.63
Restrictions lapsed and shares released to employees		(31,456	)		26.78
Shares forfeited		(4,040	)		29.47
Unvested at March 31, 2016		102,333		$	32.28

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Stock Yards Bancorp, inc. and subsidiary

Bancorp awarded performance-based restricted stock units (“PSUs”) to executive officers of Bancorp, the single three-year performance period for which began January 1 of the award year. The following table outlines the PSU grants.

	Vesting				Expected
Grant	period		Fair		shares to
year	in years		value		be awarded
2014		3	$	26.42		33,349
2015		3		30.03		21,258
2016		3		33.92		18,442

In the first quarter of 2016, Bancorp awarded 5,432 RSUs to directors of Bancorp with a grant date fair value of $200 thousand.

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Net Income Per Share

The following table reflects, for the three months ended March 31, 2016 and 2015, net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:

	Three months ended
(In thousands, except per share data)	March 31
	2016		2015
Net income	$	9,835	$	9,255
Average shares outstanding		14,836		14,647
Dilutive securities		225		205

Average shares outstanding including dilutive securities including dilutive securities		15,061		14,852

Net income per share, basic	$	0.66	$	0.63
Net income per share, diluted	$	0.65	$	0.62

(14)

Segments

Bancorp’s principal activities include commercial banking and investment management and trust. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage origination and securities brokerage activity. Investment management and trust provides wealth management services including investment management, trust and estate administration, and retirement plan services.

Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax exempt activity. All tax exempt activity and provision for loan losses have been allocated to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.

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Stock Yards Bancorp, inc. and subsidiary

Selected financial information by business segment for the three month periods ended March 31, 2016 and 2015 follows:

			Investment
	Commercial		management
(in thousands)	banking		and trust		Total
Three months ended March 31, 2016
Net interest income	$	23,407	$	62	$	23,469
Provision for loan losses		500		-		500
Investment management and trust revenue		-		4,612		4,612
All other non-interest income		5,470		-		5,470
Non-interest expense		16,895		2,645		19,540
Income before income taxes		11,482		2,029		13,511
Tax expense		2,951		725		3,676
Net income	$	8,531	$	1,304	$	9,835

Three months ended March 31, 2015
Net interest income	$	21,560	$	54	$	21,614
Provision for loan losses		-		-		-
Investment management and trust revenue		-		4,552		4,552
All other non-interest income		5,121		-		5,121
Non-interest expense		15,191		2,588		17,779
Income before income taxes		11,490		2,018		13,508
Tax expense		3,534		719		4,253
Net income	$	7,956	$	1,299	$	9,255

(15)

Income Taxes

Components of income tax expense from operations were as follows:

	Three months ended March 31,
(in thousands)	2015		2014
Current tax expense
Federal	$	2,373	$	3,076
State		124		87
Total current tax expense		2,497		3,163

Deferred tax expense
Federal		1,101		984
State		78		106
Total deferred tax expense		1,179		1,090
Total income tax expense	$	3,676	$	4,253

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Stock Yards Bancorp, inc. and subsidiary

An analysis of the difference between statutory and effective tax rates for the three months ended March 31, 2016 and 2015 follows:

	Three months ended March 31,
	2016			2015
U.S. federal statutory tax rate		35.0	%		35.0	%
Tax credits		(9.7	)		(2.4	)
Tax exempt interest income		(1.3	)		(1.4	)
Cash surrender value of life insurance		(0.8	)		(1.0	)
State income taxes		1.0			0.9
Other, net		3.0			0.4
Effective tax rate		27.2	%		31.5	%

State income tax expense represents tax owed in Indiana. Kentucky and Ohio state bank taxes are based on capital levels, and are recorded as other non-interest expense.

US GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. As of March 31, 2016 and December 31, 2015, the gross amount of unrecognized tax benefits, including penalties and interest, was $45 thousand and $42 thousand, respectively. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. Federal and state income tax returns are subject to examination for the years after 2011.

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Assets and Liabilities Measured and Reported at Fair Value

Bancorp follows the provisions of authoritative guidance for fair value measurements. This guidance is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by US GAAP. The guidance also prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in US GAAP.

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. The guidance also establishes a hierarchy to group assets and liabilities carried at fair value in three levels based upon the markets in which the assets and liabilities trade and the reliability of assumptions used to determine fair value. These levels are:

●

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.

●

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

●

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions would reflect internal estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques could include pricing models, discounted cash flows and other similar techniques.

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Stock Yards Bancorp, inc. and subsidiary

Authoritative guidance requires maximization of use of observable inputs and minimization of use of unobservable inputs in fair value measurements. Where there exists limited or no observable market data, Bancorp derives its own estimates by generally considering characteristics of the asset/liability, the current economic and competitive environment and other factors. For this reason, results cannot be determined with precision and may not be realized on an actual sale or immediate settlement of the asset or liability.

Bancorp’s investment securities available-for-sale and interest rate swaps are recorded at fair value on a recurring basis. Other accounts including mortgage servicing rights, impaired loans and other real estate owned may be recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets.

The portfolio of investment securities available-for-sale is comprised of U.S. Treasury and other U.S. government obligations, debt securities of U.S. government-sponsored corporations (including mortgage-backed securities), obligations of state and political subdivisions and corporate equity securities. U.S. Treasury and corporate equity securities are priced using quoted prices of identical securities in an active market. These measurements are classified as Level 1 in the hierarchy above. All other securities are priced using standard industry models or matrices with various assumptions such as yield curves, volatility, prepayment speeds, default rates, time value, credit rating and market prices for similar instruments. These assumptions are generally observable in the market place and can be derived from or supported by observable data. These measurements are classified as Level 2 in the hierarchy above.

Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements generally based on benchmark forward yield curves and other relevant observable market data. For purposes of potential valuation adjustments to derivative positions, Bancorp evaluates the credit risk of its counterparties as well as its own credit risk. To date, Bancorp has not realized any losses due to a counterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2016.

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Stock Yards Bancorp, inc. and subsidiary

Below are the carrying values of assets measured at fair value on a recurring basis.

(in thousands)	Fair value at March 31, 2016
Assets	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
Government sponsored enterprise obligations	$	336,916	$	-	$	336,916	$	-
Mortgage-backed securities - government agencies		169,111		-		169,111		-
Obligations of states and political subdivisions		62,336		-		62,336		-
Corporate equity securities		649		649		-		-

Total investment securities available-for-sale		569,012		649		568,363		-

Interest rate swaps		944		-		944		-

Total assets	$	569,956	$	649	$	569,307	$	-

Liabilities

Interest rate swaps	$	1,559	$	-	$	1,559	$	-

(in thousands)	Fair value at December 31, 2015
Assets	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
U.S. Treasury and other U.S. government obligations	$	80,000	$	80,000	$	-	$	-
Government sponsored enterprise obligations		251,893		-		251,893		-
Mortgage-backed securities - government agencies		169,628		-		169,628		-
Obligations of states and political subdivisions		63,702		-		63,702		-
Corporate equity securities		653		653		-		-

Total investment securities available-for-sale		565,876		80,653		485,223		-

Interest rate swaps		461		-		461		-

Total assets	$	566,337	$	80,653	$	485,684	$	-

Liabilities

Interest rate swaps	$	554	$	-	$	554	$	-

Bancorp had no financial instruments classified within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis at March 31, 2016 or December 31, 2015.

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Stock Yards Bancorp, inc. and subsidiary

MSRs are recorded at fair value upon capitalization, are amortized to correspond with estimated servicing income, and are periodically assessed for impairment based on fair value at the reporting date. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At March 31, 2016 and December 31, 2015 there was no valuation allowance for the mortgage servicing rights, as the fair value exceeded the cost. Accordingly, the MSRs are not included in either table below for March 31, 2016 or December 31, 2015. See Note 8 for more information regarding MSRs.

For impaired loans in the table below, the fair value is calculated as the carrying value of only loans with a specific valuation allowance, less the specific allowance. Fair value of impaired loans was primarily measured based on the value of the collateral securing these loans. Impaired loans are classified within Level 3 of the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable. Bancorp determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. As of March 31, 2016, total impaired loans with a valuation allowance were $2.0 million, and the specific allowance totaled $748 thousand, resulting in a fair value of $1.3 million, compared to total impaired loans with a valuation allowance of $2.6 million, and the specific allowance allocation totaling $544 thousand, resulting in a fair value of $2.1 million at December 31, 2015. Losses represent the change in specific allowances for the period indicated.

Other real estate owned (“OREO”), which is carried at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is based on appraisals performed by external parties which use judgments and assumptions that are property-specific and sensitive to changes in the overall economic environment. Appraisals may be further discounted based on management’s historical knowledge and/or changes in market conditions from the date of the most recent appraisal. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. For OREO in the table below, fair value is the carrying value of only parcels of OREO which have a carrying value equal to appraised value. Losses represent write-downs which occurred during the period indicated. At March 31, 2016 and December 31, 2015, carrying value of all other real estate owned was $5.0 million and $4.5 million, respectively.

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Below are the carrying values of assets measured at fair value on a non-recurring basis.

(in thousands)	Fair value at March 31, 2016								Losses for 3 month
									period ended
	Total		Level 1		Level 2		Level 3		March 31, 2016
Impaired loans	$	1,294	$	-	$	-	$	1,294	$	(406	)
Other real estate owned		4,291		-		-		4,291		-
Total	$	5,585	$	-	$	-	$	5,585	$	(406	)

(in thousands)	Fair value at December 31, 2015								Losses for 3 month
									period ended
	Total		Level 1		Level 2		Level 3		March 31, 2015
Impaired loans	$	2,058	$	-	$	-	$	2,058	$	(206	)
Other real estate owned		3,782		-		-		3,782		-
Total	$	5,840	$	-	$	-	$	5,840	$	(206	)

For the securities portfolio, Bancorp monitors the valuation technique utilized by pricing agencies to ascertain when transfers between levels have occurred. The nature of other assets and liabilities measured at fair value is such that transfers in and out of any level are expected to be rare. For the three months ended March 31, 2016, there were no transfers between Levels 1, 2, or 3. For Level 3 assets measured at fair value on a non-recurring basis as of March 31, 2016, the significant unobservable inputs used in the fair value measurements are presented below.

Significant

Weighted

Fair

Valuation

unobservable

average of

(Dollars in thousands)

Value

technique

input

Impaired loans - collateral dependent

1,294

Appraisal

Appraisal discounts (%)

6.0

Other real estate owned

4,291

Appraisal

Appraisal discounts

17.6

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Disclosure of Financial Instruments Not Reported at Fair Value

US GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. Carrying amounts, estimated fair values, and placement in the fair value hierarchy of Bancorp’s financial instruments are as follows:

(in thousands)	Carrying
March 31, 2016	amount		Fair value		Level 1		Level 2		Level 3

Financial assets
Cash and short-term investments	$	48,038	$	48,038	$	48,038	$	-	$	-
Mortgage loans held for sale		3,984		4,119		-		4,119		-
Federal Home Loan Bank stock and other securities		6,347		6,347		-		6,347		-
Loans, net		2,072,037		2,095,613		-		-		2,095,613
Accrued interest receivable		7,146		7,146		7,146		-		-

Financial liabilities
Deposits		2,366,100		2,366,239		-		-		2,366,239
Short-term borrowings		84,864		84,864		-		84,864		-
FHLB advances		43,236		44,385		-		44,385		-
Accrued interest payable		119		119		119		-		-

(in thousands)	Carrying
December 31, 2015	amount		Fair value		Level 1		Level 2		Level 3

Financial assets
Cash and short-term investments	$	103,833	$	103,833	$	103,833	$	-	$	-
Mortgage loans held for sale		6,800		7,112		-		7,112		-
Federal Home Loan Bank stock and other securities		6,347		6,347		-		6,347		-
Loans, net		2,010,566		2,021,776		-		-		2,021,776
Accrued interest receivable		6,610		6,610		6,610		-		-

Financial liabilities
Deposits		2,371,702		2,371,300		-		-		2,371,300
Short-term borrowings		87,003		87,003		-		87,003		-
FHLB advances		43,468		43,647		-		43,647		-
Accrued interest payable		127		127		127		-		-

Management used the following methods and assumptions to estimate the fair value of each class of financial instrument for which it is practicable to estimate the value.

Cash, short-term investments, accrued interest receivable/payable and short-term borrowings

For these short-term instruments, carrying amount is a reasonable estimate of fair value.

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Stock Yards Bancorp, inc. and subsidiary

Mortgage loans held for sale

Mortgage loans held for sale are initially recorded at the lower of cost or market value. The portfolio is comprised of residential real estate loans and fair value is determined by market quotes for similar loans based on loan type, term, rate, size and the borrower’s credit score.

Federal Home Loan Bank stock and other securities

For these securities without readily available market values, carrying amount is a reasonable estimate of fair value as it equals the amount due from FHLB or other issuer at upon redemption.

Loans, net

US GAAP prescribes the exit price concept for estimating fair value of loans. Because there is not an active market (exit price) for trading virtually all types of loans in Bancorp’s portfolio, fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities (entrance price).

Deposits

Fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. Fair value of fixed-rate certificates of deposits is estimated by discounting future cash flows using the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank advances

Fair value of FHLB advances is estimated by discounting future cash flows using estimates of current market rate for instruments with similar terms and remaining maturities.

Commitments to extend credit and standby letters of credit

Fair values of commitments to extend credit are estimated using fees currently charged to enter into similar agreements and creditworthiness of customers. Fair values of standby letters of credit are based on fees currently charged for similar agreements or estimated cost to terminate them or otherwise settle obligations with counterparties at the reporting date. Fair value of commitments to extend credit, letters of credit and lines of credit is not presented since management believes the fair value to be insignificant.

Limitations

Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly affect estimates.

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Stock Yards Bancorp, inc. and subsidiary

(18)

Regulatory Matters

Bancorp and the Bank are subject to various capital requirements prescribed by banking regulations and administered by state and federal banking agencies. Under these requirements, Bancorp and the Bank must meet minimum amounts and percentages of Tier 1, common equity Tier 1, and total capital, as defined, to risk weighted assets and Tier 1 capital to average assets. Risk weighted assets are determined by applying certain risk weightings prescribed by the regulations to various categories of assets and off-balance sheet commitments. Capital and risk weighted assets may be further subject to qualitative judgments by regulators as to components, risk weighting and other factors. Failure to meet the capital requirements can result in certain mandatory, and possibly discretionary, corrective actions prescribed by the regulations or determined to be necessary by the regulators, which could materially affect the unaudited consolidated financial statements.

In 2013, the Federal Reserve Board and the FDIC approved rules that substantially amended the regulatory risk-based capital rules applicable to Bancorp and Bank. The rules implemented the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" (Basel III) and changes required by the Dodd-Frank Act. The Basel III regulatory capital reforms became effective for Bancorp and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. Bancorp and the Bank met all capital requirements to which they were subject as of March 31, 2016.

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios as of March 31, 2016 and December 31, 2015.

(Dollars in thousands)	Actual					Minimum for adequately capitalized					Minimum for well capitalized
March 31, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total risk-based capital (1)
Consolidated	$	313,931		13.19	%	$	190,405		8.00	%	NA		NA
Bank		304,384		12.81			190,091		8.00		$	237,614		10.00	%

Common Equity Tier 1 risk-based capital
Consolidated		291,093		12.23			107,107		4.50		NA		NA
Bank		281,546		11.85			106,916		4.50			142,555		6.00

Tier 1 risk-based capital (1)
Consolidated		291,093		12.23			142,809		6.00		NA		NA
Bank		281,546		11.85			142,555		6.00			142,555		6.00

Leverage (2)
Consolidated		291,093		10.35			112,500		4.00		NA		NA
Bank		281,546		10.02			112,394		4.00			140,492		5.00

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Stock Yards Bancorp, inc. and subsidiary

(Dollars in thousands)	Actual					Minimum for adequately capitalized					Minimum for well capitalized
December 31, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total risk-based capital (1)
Consolidated	$	307,666		13.31	%	$	184,923		8.00	%	NA		NA
Bank		298,129		12.91			184,743		8.00		$	230,929		10.00	%

Common Equity Tier 1 risk-based capital
Consolidated		284,793		12.32			104,023		4.50		NA		NA
Bank		275,256		11.92			103,914		4.50			138,552		6.00

Tier 1 risk-based capital (1)
Consolidated		284,793		12.32			138,698		6.00		NA		NA
Bank		275,256		11.92			138,552		6.00			138,552		6.00

Leverage (2)
Consolidated		284,793		10.53			108,183		4.00		NA		NA
Bank		275,256		10.19			108,049		4.00			135,062		5.00

(1)

Ratio is computed in relation to risk-weighted assets.

(2)

Ratio is computed in relation to average assets.

Not applicable. Regulatory framework does not define well capitalized for holding companies.

(19)

Subsequent Event

On April 29, 2016, Bancorp’s Board of Directors approved 3 for 2 stock split to be effected as a 50% stock dividend, payable on May 27, 2016 for shareholders of record on May 13, 2016. Based on our shares outstanding totaling 14,985,768 as of April 25, 2016, Bancorp expects this transaction to result in the issuance of approximately 7,490,000 additional shares. No share or per share amounts included in this Form 10-Q have been adjusted for this stock split.

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Stock Yards Bancorp, inc. and subsidiary

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

This item discusses the results of operations for Stock Yards Bancorp, Inc. (“Bancorp” or “Company”), and its subsidiary, Stock Yards Bank & Trust Company (“Bank”) for the three months ended March 31, 2016 and compares this period with the same period of the previous year. Unless otherwise indicated, all references in this discussion to the Bank include Bancorp. In addition, the discussion describes the significant changes in the financial condition of Bancorp and the Bank that have occurred during the first three months of 2016 compared to the same period in the year ended December 31, 2015. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes presented in Part 1, Item 1 of this report.

This report contains forward-looking statements under the Private Securities Litigation Reform Act that involve risks and uncertainties. Although Bancorp believes assumptions underlying forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to the following: economic conditions both generally and more specifically in markets in which Bancorp and the Bank operate; competition for Bancorp’s customers from other providers of financial services; government legislation and regulation which change from time to time and over which Bancorp has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of Bancorp’s customers; and other risks detailed in Bancorp’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of Bancorp.

Overview of 2016 through March 31

Bancorp completed the first quarter of 2016 with net income of $9.8 million or 6% more than the comparable period of 2015. The increase is due to higher net interest income, higher non-interest income and lower income tax expense. These increases were partially offset by the provision for loan losses and higher non-interest expenses. Diluted earnings per share for the first quarter of 2016 were $0.65, compared to the first quarter of 2015 at $0.62. Bancorp's performance for the first quarter of 2016 reflected several positive factors, including:

●

Remarkable net loan growth, accelerating from the pace set over the past two years;

●

Ongoing strength in credit quality;

●

The benefit of diverse sources of fee income, which together continued to contribute to revenue growth; and

●

Solid returns on average assets and equity of 1.40% and 13.52%, respectively.

As is the case with most banks, the primary source of Bancorp’s revenue is net interest income and fees from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. Business volumes are influenced by competition, new business acquisition efforts and economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.

Net interest income increased $1.9 million, or 8.6%, for the first quarter of 2016, compared to the same period in 2015. The positive effects of increased volumes of earning assets and lower costs on time deposits were partially offset by the negative effect of declining interest rates earned. Net interest margin declined to 3.56% for the first three months of 2016, compared to 3.72% for the same period of 2015.

In response to assessment of risk in the loan portfolio, Bancorp recorded a $500 thousand provision for loan losses in the first three months of 2016, compared to no provision in the first three months of 2015. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for the inherent losses on outstanding loans.

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Stock Yards Bancorp, inc. and subsidiary

Total non-interest income in the first three months of 2016 increased $409 thousand, or 4.2%, compared to the same period in 2015, and comprised 30% of total revenues. Increases in bankcard transaction revenue, service charges and investment management and trust revenue contributed to the growth, partially offset by decreases in mortgage banking and brokerage income.

Total non-interest expense in the first quarter of 2016 increased $1.8 million, or 9.9%, compared to the same period in 2015, largely due to increases in salaries and benefits and higher amortization of expense of investments in tax credit partnerships. These were partially offset by sales of foreclosed assets and lower other non-interest expenses. Bancorp's efficiency ratio in the first three months of 2016 was 57.9% compared with 56.4% in the same period in 2015. Excluding the amortization of the investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 54.9% and 55.9% for the first quarters of 2016 and 2015, respectively. See the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.

Bancorp’s effective tax rate decreased to 27.2% in 2016 from 31.5% in 2015. The decrease in the effective tax rate from 2015 to 2016 is the result of higher tax credits in 2016, partially offset by proportionally lower nontaxable income from the increase in cash value of life insurance.

Tangible common equity (TCE), a non-GAAP measure, is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. The ratio of tangible common equity to total tangible assets was 10.42% as of March 31, 2016, compared to 10.10% at December 31, 2015. See the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.

The following sections provide more details on subjects presented in this overview.

a)	Results Of Operations

Net income of $9.8 million for the three months ended March 31, 2016 increased $580 thousand, or 6.3%, from $9.3 million for the comparable 2015 period. Basic net income per share was $0.66 for the first quarter of 2016, an increase of 4.8% from the $0.63 for the first quarter of 2015. Diluted net income per share was $0.65 for the first quarter of 2016, an increase of 4.8% from the $0.62 for the first quarter of 2015. See Note 13 for additional information related to net income per share.

Return on average assets and annualized return on average stockholders’ equity were 1.40% and 13.52%, respectively, for the first quarter of 2016, compared to 1.49% and 14.18%, respectively, for the same period in 2015.

Net Interest Income

The following tables present the average balance sheets for the three month periods ended March 31, 2016 and 2015 along with the related calculation of tax-equivalent net interest income, net interest margin and net interest spread for the related periods. See the notes following the tables for further explanation.

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Stock Yards Bancorp, inc. and subsidiary

Average Balances and Interest Rates – Taxable Equivalent Basis

	Three months ended March 31
	2016							2015
	Average				Average			Average				Average
(Dollars in thousands)	balances		Interest		rate			balances		Interest		rate

Earning assets:
Federal funds sold	$	143,679	$	189		0.53	%	$	86,855	$	68		0.32	%
Mortgage loans held for sale		4,249		60		5.68			3,631		39		4.36
Securities:
Taxable		420,584		2,091		2.00			358,094		1,970		2.23
Tax-exempt		62,546		434		2.79			59,764		416		2.82
FHLB stock and other securities		6,347		64		4.06			6,347		64		4.09
Loans, net of unearned income		2,036,437		22,081		4.36			1,869,542		20,525		4.45

Total earning assets		2,673,842		24,919		3.75			2,384,233		23,082		3.93

Less allowance for loan losses		22,685							25,210

		2,651,157							2,359,023
Non-earning assets:
Cash and due from banks		38,517							36,836
Premises and equipment		39,712							39,513
Accrued interest receivable and other assets		88,686							90,381

Total assets	$	2,818,072						$	2,525,753

Interest bearing liabilities:
Deposits:
Interest bearing demand deposits	$	726,627	$	258		0.14	%	$	500,952	$	129		0.10	%
Savings deposits		131,051		12		0.04			114,381		10		0.04
Money market deposits		657,371		356		0.22			674,924		334		0.20
Time deposits		263,298		370		0.57			306,345		500		0.66
Securities sold under agreements to repurchase		58,871		33		0.23			64,344		37		0.23
Federal funds purchased and other short term borrowings		23,456		15		0.26			15,874		7		0.18
FHLB advances		43,316		187		1.74			36,774		216		2.38

Total interest bearing liabilities		1,903,990		1,231		0.26			1,713,594		1,233		0.29

Non-interest bearing liabilities:
Non-interest bearing demand deposits		592,472							520,253
Accrued interest payable and other liabilities		29,070							27,212
Total liabilities		2,525,532							2,261,059

Stockholders’ equity		292,540							264,694

Total liabilities and stockholders’ equity	$	2,818,072						$	2,525,753
Net interest income			$	23,688						$	21,849
Net interest spread						3.49	%						3.64	%
Net interest margin						3.56	%						3.72	%

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Notes to the average balance and interest rate tables:

●

Net interest income, the most significant component of the Bank's earnings is total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.

●

Net interest spread is the difference between the taxable equivalent rate earned on interest earning assets less the rate expensed on interest bearing liabilities.

●

Net interest margin represents net interest income on a taxable equivalent basis as a percentage of average interest earning assets. Net interest margin is affected by both interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity.

●

Interest income on a fully tax equivalent basis includes the additional amount of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and loans have been calculated on a fully tax equivalent basis using a federal income tax rate of 35%. Approximate tax equivalent adjustments to interest income were $219 thousand and $235 thousand, respectively, for the three month periods ended March 31, 2016 and 2015.

●

Average balances for loans include the principal balance of non-accrual loans and exclude participation loans accounted for as secured borrowings. These participation loans averaged $7.0 million and $8.1 million for the three month periods ended March 31, 2016 and 2015.

Fully taxable equivalent net interest income of $23.7 million for the three months ended March 31, 2016 increased $1.8 million, or 8.4%, from $21.8 million when compared to the same period last year. The positive effects of increased volumes of loans and lower costs on time deposits were partially offset by the negative effect of declining interest rates earned. Net interest spread and net interest margin were 3.49% and 3.56%, respectively, for the first quarter of 2016 and 3.64% and 3.72%, respectively, for the first quarter of 2015.

Average earning assets increased $289.6 million or 12.2%, to $2.67 billion for the first three months of 2016 compared to 2015, reflecting growth in the loan portfolio, investment securities and fed funds sold. Average interest bearing liabilities increased $190.4 million, or 11.1%, to $1.90 billion for the first three months of 2016 compared to 2015 primarily due to increases in interest bearing demand and savings deposits, federal funds purchased and FHLB advances, partially offset by decreases in time and money market deposits and securities sold under agreements to repurchase.

Asset/Liability Management and Interest Rate Risk

Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity while attempting to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.

Interest Rate Simulation Sensitivity Analysis

Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one year forecast. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and does not indicate actual expected results.

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Stock Yards Bancorp, inc. and subsidiary

Bancorp assumes certain correlation rates, often referred to as a “deposit beta” of interest-bearing deposits, wherein the rates paid to customers change at a different pace when compared to changes in benchmark interest rates. Generally, certificates of deposit are assumed to have a higher correlation rate, while interest-bearing checking accounts are assumed to have a lower correlation rate. Actual results may differ due to factors including competitive pricing and money supply; however, Bancorp uses its historical experience as well as industry data to inform its assumptions.

The March 31, 2016 simulation analysis, which shows little interest rate sensitivity, indicates that an increase in interest rates of 100 to 200 basis points would have a negative effect on net interest income, and a decrease of 100 basis points in interest rates would also have a negative impact. These estimates are summarized below.

	Net interest income change
Increase 200bp		(2.38	)%
Increase 100bp		(1.83	)
Decrease 100bp		(1.80	)
Decrease 200bp		N/A

Management expects that net interest margin will remain under pressure through 2016, and any near-term increases in prevailing interest rates will not immediately benefit Bancorp. Approximately 65% of its loan portfolio has fixed rates and 14% of its loan portfolio is priced at variable rates with floors of 4% or higher. Since the prime rate is currently 3.50%, a rise in rates would have a short-term negative impact on net interest income since rates would have to increase more than 50 bps before the rates on such loans will rise to compensate for higher interest costs. This effect is captured in the simulation analysis above. The extent of margin compression also will be affected by the need to respond to competitive pressures on funding sources.

The scenario of rates decreasing 200 bp is not reasonably possible given current low rates for short-term instruments and most deposits.

Undesignated derivative instruments described in Note 7 are recognized on the consolidated balance sheet at fair value, with changes in fair value, due to changes in prevailing interest rates, recorded in other non-interest income. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above.

Derivatives designated as cash flow hedges described in Note 7 are recognized on the consolidated balance sheet at fair value, with changes in fair value, due to changes in prevailing interest rates, recorded net of tax in other comprehensive income.

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Stock Yards Bancorp, inc. and subsidiary

Provision for Loan Losses

The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for inherent losses on outstanding loans. The allowance for loan losses is calculated after considering credit quality factors, and ultimately relies on an overall internal analysis of risk in the loan portfolio. Based on this analysis, the provision for loan losses is determined and recorded. The provision reflects an allowance methodology that is driven by risk ratings, historical losses, and qualitative factors. Bancorp recorded a $500 thousand provision for loan losses in the first three months of 2016, compared to no provision for the same period of 2015.

Management utilizes loan grading procedures which result in specific allowance allocations for estimated inherent risk of loss. For all loans graded, but not individually reviewed for allowance purposes, a general allowance allocation is computed using historical data based on actual loss experience. Specific and general allocations plus consideration of qualitative factors represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses. Based on this detailed analysis of credit risk, management considers the allowance for loan losses adequate to cover probable losses inherent in the loan portfolio at March 31, 2016.

An analysis of the changes in the allowance for loan losses and selected ratios for the three month periods ended March 31, 2016 and 2015 follows:

	Three months ended March 31,
(Dollars in thousands)	2016			2015

Balance at the beginning of the period	$	22,441		$	24,920
Provision for loan losses		500			-
Loan charge-offs, net of recoveries		(490	)		(38	)
Balance at the end of the period	$	22,451		$	24,882
Average loans, net of unearned income	$	2,043,450		$	1,877,594
Provision for loan losses to average loans (1)		0.02	%		0.00	%
Net loan charge-offs to average loans (1)		0.02	%		0.00	%
Allowance for loan losses to average loans		1.10	%		1.33	%
Allowance for loan losses to period-end loans		1.07	%		1.33	%

(1)

Amounts not annualized

Loans are charged off when deemed uncollectible and a loss is identified or after underlying collateral has been liquidated; however, collection efforts may continue and future recoveries may occur. Periodically, loans are partially charged off to net realizable value based upon collateral analysis and collection status.

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Stock Yards Bancorp, inc. and subsidiary

An analysis of net charge-offs by loan category for the three month periods ended March 31, 2016 and 2015 follows:

(in thousands)	Three months
	ended March 31,
Net loan charge-offs (recoveries)	2016			2015
Commercial and industrial	$	316		$	5
Construction and development, excluding undeveloped land		(10	)		-
Undeveloped land		-			-
Real estate mortgage - commercial investment		(1	)		-
Real estate mortgage - owner occupied commercial		183			1
Real estate mortgage - 1-4 family residential		1			51
Home equity		-			(4	)
Consumer		1			(15	)
Total net loan charge-offs	$	490		$	38

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Stock Yards Bancorp, inc. and subsidiary

Non-interest Income and Expenses

The following table sets forth major components of non-interest income and expenses for the three month periods ended March 31, 2016 and 2015.

	Three months
	ended March 31,
(dollars in thousands)	2016		2015		Change			%

Non-interest income:
Investment management and trust revenue	$	4,612	$	4,552	$	60			1.3	%
Service charges on deposit accounts		2,146		2,080		66			3.2	%
Bankcard transaction revenue		1,310		1,122		188			16.8	%
Mortgage banking revenue		794		828		(34	)		-4.1	%
Brokerage commissions and fees		443		461		(18	)		-3.9	%
Bank owned life insurance income		221		222		(1	)		-0.5	%
Other		556		408		148			36.3	%
Total non-interest income	$	10,082	$	9,673	$	409			4.2	%
Non-interest expenses:
Salaries and employee benefits	$	12,195	$	11,100	$	1,095			9.9	%
Net occupancy expense		1,524		1,469		55			3.7	%
Data processing expense		1,544		1,454		90			6.2	%
Furniture and equipment expense		285		247		38			15.4	%
FDIC insurance expense		328		297		31			10.4	%
Amortization of investments in tax credit partnerships		1,015		158		857			*
Other		2,649		3,054		(405	)		-13.3	%
Total non-interest expenses	$	19,540	$	17,779	$	1,761			9.9	%

(*) - Amount exceeds 100%

The largest component of non-interest income is investment management and trust (“IM&T”) revenue. The magnitude of IM&T revenue distinguishes Bancorp from other community banks of similar asset size. Assets under management, stated at market value, totaled $2.26 billion at March 31, 2016, compared to $2.29 billion at March 31, 2015. IM&T services revenue, which constitutes an average of 45% of non-interest income, increased $60 thousand, or 1.3%, for the first quarter of 2016 compared to the same period in 2015. Recurring fees, which generally comprise over 95% of the IM&T revenue, decreased $23 thousand, or 1%, in the first three months of 2016, compared to 2015. Most recurring fees earned for managing accounts are based on a percentage of market value on a monthly basis. Some revenues of the IM&T department, most notably executor, insurance, and some employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues corresponds with the related administrative activities. Total non-recurring fees increased $83 thousand for the first three months of 2016, compared to 2015. Management believes the IM&T department will continue to factor significantly in Bancorp’s financial results and provide strategic diversity to revenue streams but notes that increased market volatility could affect near-term results.

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Service charges on deposit accounts increased $66 thousand, or 3.2%, in the first quarter of 2016 compared to the same period in 2015. Service charge income is driven by transaction volume, which can fluctuate throughout the year. A significant component of service charges is related to fees earned on overdrawn checking accounts. Management expects this source of revenue to slowly decline due to anticipated changes in customer behavior and ongoing regulatory restrictions.

Bankcard transaction revenue increased $188 thousand, or 16.8%, in the first quarter of 2016 compared to the same period in 2015, and primarily represents interchange income the Bank derives from customers’ use of debit and credit cards. Interchange income on debit cards increased $45,000, or 4.0%, as a result of increased volume. However, Bancorp expects a slight decrease in interchange rates on debit cards as service providers gravitate to lower cost options in a competitive market. Late in 2015, Bancorp began offering credit cards to business customers. Income on credit cards totaled $143,000 in the first quarter of 2016. Bancorp expects volume of credit card transactions to increase slowly over 2016.

Mortgage banking revenue primarily includes gains on sales of mortgage loans. Bancorp’s mortgage banking department originates residential mortgage loans to be sold in the secondary market. Interest rates on the loans sold are locked with the borrower and investor prior to closing the loans, thus Bancorp bears no interest rate risk related to these loans. The department offers conventional, VA and FHA financing, for purchases and refinances, as well as programs for first-time home buyers. Interest rates on mortgage loans directly impact the volume of business transacted by the mortgage banking division. Mortgage banking revenue decreased $34 thousand, or 4.1%, in the first quarter of 2016 compared to the same period in 2015. As rates declined in 2016 compared to the same period in 2015, Bancorp experienced a slight increase in purchase transactions, but it was more than offset by a decrease in refinance activity. The lower rates were not enough to stimulate refinance activity at a level previously experienced.

Brokerage commissions and fees decreased $18 thousand, or 3.9%, in the first quarter of 2016 compared to the same period in 2015, corresponding to overall brokerage volume. Brokerage commissions and fees earned consist primarily of stock, bond and mutual fund sales as well as wrap fees on accounts. Wrap fees are charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management, and are based on a percentage of assets. Bancorp deploys its brokers primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced in the Bank’s IM&T department.

Bank Owned Life Insurance (BOLI) income was essentially flat for the first quarter of 2016 compared to 2015. BOLI represents the cash surrender value for life insurance policies on certain key employees who have provided consent for Bancorp to be the beneficiary of a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income helps offset the cost of various employee benefits.

Other non-interest income increased $148 thousand, or 36.3%, in the first three months of 2016 compared to the same period in 2015. Included in this category is swap fee income, which totaled $171 thousand for the first quarter of 2016. Bancorp earned no swap fee income in the first quarter of 2015. Opportunities to earn swap fee income are infrequent due to the specialized nature of the transactions. This category includes a variety of other factors, none of which had individually significant variances.

Salaries and employee benefits increased $1.1 million, or 9.9%, for the first quarter of 2016 compared to the same period of 2015, due largely to higher salaries and wages, reflecting both increased incentive compensation related to accelerating loan and earnings growth as well as the addition of personnel associated with continued expansion in the Cincinnati and Indianapolis markets. Somewhat offsetting the increase in salaries and wages was a reversal of accrued health insurance expense that coincided with the Bancorp’s self-insured plan year. At March 31, 2016 Bancorp had 550 full-time equivalent employees compared to 533 at March 31, 2015.

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Net occupancy expense increased $55 thousand, or 3.7%, in the first quarter of 2016 compared to the same period of 2015. The increase was largely due to higher rent and depreciation for locations added during 2015 and increased maintenance expense.

Data processing expense increased $90 thousand, or 6.2% in the first quarter of 2016 compared to the same period of 2015 due to processing expenses related to credit cards as well as a variety of other factors, none of which was individually significant. This category also includes ongoing computer software amortization and maintenance related to investments in new technology needed to maintain and improve the quality of delivery channels and internal resources.

Furniture and equipment expense increased $38 thousand, or 15.4% for the first quarter of 2016 compared to the same period in 2015. These fluctuations relate to a variety of factors, none of which were individually significant. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense.

FDIC insurance expense increased $31 thousand, or 10.4%, for the first quarter of 2016 compared to the same period in 2015. The assessment is calculated by the FDIC and adjusted quarterly. The increase in expense is due primarily to higher level of net assets, partially offset by a reduction in the assessment rate, which was driven by improved credit metrics.

Amortization of investments in tax credit partnerships increased $857 thousand for the first three months of 2016, compared to the same period of 2015. This expense reflects amortization of investments in partnerships which generate historic and new market federal income tax credits and can vary widely depending upon the timing of investments and related amortization. See the Income Taxes section below for details on amortization and income tax impact for these credits.

Other non-interest expenses decreased $405 thousand or 13.3% in the first quarter of 2016 compared to the same period in 2015. The decrease is largely due to $333 thousand of gains on sales of foreclosed assets in 2016 compared to $20 thousand of losses in 2015. Also included is MSR amortization, which declined $122 from 2015 to 2016 as pools of MSRs added several years ago were fully amortized in 2015. This category also includes legal and professional fees, advertising, printing, mail and telecommunications, none of which had individually significant variances.

Income Taxes

In the first quarter of 2016, Bancorp recorded income tax expense of $3.7 million, compared to $4.3 million for the same period in 2015. The effective rate for the three month period was 27.2% in 2016 and 31.5% in 2015. The decrease in the effective tax rate from 2015 to 2016 is the result of higher utilization of tax credits in 2016, partially offset by proportionally lower nontaxable income from the increase in cash value of life insurance.

Bancorp invests in certain partnerships that yield low-income housing, historic and new market tax credits. The tax benefits and related investment amortization expenses for low-income housing credits are recognized in income tax expense using a proportional amortization method which amortizes the investment in proportion to the tax credits and other tax benefits received. The amortization method for investments in new markets and historic tax credit partnerships is the cost method which matches the amortization period with the time frame over which the credits are realized. For each of Bancorp’s investments in tax credit partnerships, when taken as a whole, the tax benefit compared to the amortization results in a positive effect on net income.

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Commitments

Bancorp uses a variety of financial instruments in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. A discussion of Bancorp’s commitments is included in Note 10.

Other commitments discussed in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015, have not materially changed since that report was filed, relative to qualitative and quantitative disclosures of fixed and determinable contractual obligations.

b)	Financial Condition

Balance Sheet

Total assets increased $7.3 million, or 0.3%, from $2.817 billion on December 31, 2015 to $2.824 billion on March 31, 2016. Loans grew $61.5 million in the first three months of 2016 as a result of loan production which outpaced record production in 2015. All of this growth has been organic and, importantly, each of Bancorp's three markets continues to participate in the accelerated lending activity. It has been especially apparent in the Cincinnati market due to Bancorp's expansion into the northern Kentucky area of the Cincinnati MSA in mid-2015. Securities available-for-sale increased $3.1 million. Included in securities available-for-sale are short term obligations of U.S. Treasury or U.S. government sponsored entities. These securities, which totaled $100 million at March 31, 2016 and December 31, 2015, normally have a maturity of less than one month, and are purchased at quarter-end as part of a tax minimization strategy. Cash and cash equivalents decreased $55.8 million, while mortgage loans held for sale decreased $2.8 million.

Total liabilities decreased $2.5 million, or 0.1%, from $2.530 billion on December 31, 2015 to $2.528 billion on March 31, 2016. Deposits decreased $5.6 million or 0.2% and securities sold under agreement to repurchase decreased $9.7 million or 15.1%. Federal funds purchased increased $7.6 million, or 33.8%. Bancorp utilizes short-term lines of credit to manage its overall liquidity position. Other liabilities increased $5.5 million or 19.6% as the result of a short term payable amount.

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Elements of Loan Portfolio

The following table sets forth the major classifications of the loan portfolio.

(in thousands)
Loans by Type	March 31, 2016		December 31, 2015
Commercial and industrial	$	676,782	$	644,398
Construction and development, excluding undeveloped land		139,148		134,482
Undeveloped land (1)		21,519		21,185
Real estate mortgage:
Commercial investment		496,647		482,639
Owner occupied commercial		372,811		375,016
1-4 family residential		234,199		226,575
Home equity - first lien		52,042		50,115
Home equity - junior lien		63,336		63,066
Subtotal: Real estate mortgage		1,219,035		1,197,411

Consumer		38,004		35,531

Total Loans	$	2,094,488	$	2,033,007

(1)

Undeveloped land consists of land initially acquired for development by the borrower, but for which no development has yet taken place.

Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain sold participation loans, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their share of the loan without permission from Bancorp. US GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the commercial and industrial and real estate mortgage loan totals above, and a corresponding liability is recorded in other liabilities. At March 31, 2016 and December 31, 2015, the total participated portions of loans of this nature were $6.7 million and $7.2 million, respectively.

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Non-performing Loans and Assets

Information summarizing non-performing assets, including non-accrual loans follows:

(Dollars in thousands)	March 31, 2016			December 31, 2015

Non-accrual loans	$	7,878		$	7,693
Troubled debt restructuring		1,040			1,060
Loans past due 90 days or more and still accruing		-			176

Non-performing loans		8,918			8,929

Foreclosed real estate		5,049			4,541

Non-performing assets	$	13,967		$	13,470

Non-performing loans as a percentage of total loans		0.43	%		0.44	%
Non-performing assets as a percentage of total assets		0.49	%		0.48	%

The following table sets forth the major classifications of non-accrual loans:

(in thousands)
Non-accrual loans by type	March 31, 2016		December 31, 2015
Commercial and industrial	$	3,673	$	3,643
Construction and development, excluding undeveloped land		-		-
Undeveloped land		-		-
Real estate mortgage - commercial investment		204		278
Real estate mortgage - owner occupied commercial		2,565		2,761
Real estate mortgage - 1-4 family residential		1,115		906
Home equity and consumer loans		321		105
Total loans	$	7,878	$	7,693

c)	Liquidity

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity is provided by short-term liquid assets that can be converted to cash, investment securities available-for-sale, various lines of credit available to Bancorp, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than market rate.

Bancorp’s most liquid assets are comprised of cash and due from banks, available-for-sale marketable investment securities and federal funds sold. Federal funds sold totaled $13.0 million at March 31, 2016. These investments normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $569.0 million at March 31, 2016. The portfolio includes maturities of approximately $115.7 million over the next twelve months, including $100 million of short-term securities which matured in April 2016. Combined with federal funds sold, these offer substantial resources to meet either new loan demand or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of its investment securities portfolio to secure public fund deposits, cash balances of certain investment management and trust accounts, and securities sold under agreements to repurchase. At March 31, 2016, total investment securities pledged for these purposes comprised 59% of the available-for-sale investment portfolio, leaving $231.2 million of unpledged securities.

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Bancorp has a large base of non-maturity customer deposits, defined as demand, savings, and money market deposit accounts. At March 31, 2016, such deposits totaled $2.11 billion and represented 89% of Bancorp’s total deposits. Because these deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships they do not put heavy pressure on liquidity. However, many of Bancorp’s overall deposit balances are historically high. When market conditions improve, these balances will likely decrease, putting some strain on Bancorp’s liquidity position. As of March 31, 2016, Bancorp had only $498 thousand or 0.02% of total deposits, in brokered deposits.

Included in the total deposit balances at March 31, 2016 is $173.5 million of public funds deposits, generally comprised of accounts from local government agencies and public schools in our markets. As a result of property tax collections in late 2015, these accounts have an estimated $60 million of seasonal excess balances, which are expected to decline over the next three to six months. While this excess liquidity is maintained in low-yielding short-term investments and consequently results in lower net interest margin, it has a positive impact on net interest income.

Other sources of funds available to meet daily needs include FHLB advances. As a member of the FHLB of Cincinnati, Bancorp has access to credit products offered by the FHLB. Bancorp views these borrowings as a low cost alternative to other time deposits. At March 31, 2016, available credit from the FHLB totaled $355.6 million. Additionally, Bancorp had available federal funds purchased lines with correspondent banks totaling $75 million at March 31, 2016.

Bancorp’s principal source of cash revenues is dividends paid to it as sole shareholder of the Bank. At March 31, 2016, the Bank may pay up to $63.7 million in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank.

d)	Capital Resources

At March 31, 2016, stockholders’ equity totaled $296.3 million, an increase of $9.8 million since December 31, 2015. See the Consolidated Statement of Changes in Stockholders’ Equity for further detail of the changes in equity since the end of 2015. One component of equity is accumulated other comprehensive income which, for Bancorp, consists of net unrealized gains or losses on securities available-for-sale and hedging instruments, as well as a minimum pension liability, each net of taxes. Accumulated other comprehensive income was $3.9 million at March 31, 2016 compared to $632 thousand on December 31, 2015. The $3.3 million increase is primarily a reflection of the positive effect of the changing interest rate environment during the first three months of 2016 on the valuation of Bancorp’s portfolio of securities available-for-sale.

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The following table sets forth Bancorp’s and the Bank’s risk based capital ratios as of March 31, 2016 and December 31, 2015.

	March 31,			December 31,
	2016			2015

Total risk-based capital (1)
Consolidated		13.19	%		13.31	%
Bank		12.81			12.91

Common equity tier 1 risk-based capital (1)
Consolidated		12.23			12.32
Bank		11.85			11.92

Tier 1 risk-based capital (1)
Consolidated		12.23			12.32
Bank		11.85			11.92

Leverage (2)
Consolidated		10.35			10.53
Bank		10.02			10.19

(1)

Under the banking agencies risk-based capital guidelines, assets and credit-equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together, resulting in the Bancorp’s total risk-weighted assets. These ratios are computed in relation to average assets.

(2)

Ratio is computed in relation to average assets.

In 2013, the Federal Reserve Board and the FDIC approved rules that substantially amended the regulatory risk-based capital rules applicable to Bancorp and Bank. The rules implemented the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems" (Basel III) and changes required by the Dodd-Frank Act. The Basel III regulatory capital reforms became effective for Bancorp and Bank on January 1, 2015, and included new minimum risk-based capital and leverage ratios. The new minimum capital level requirements applicable to bank holding companies and banks subject to the rules are:

•

a new common equity Tier 1 capital ratio of 4.5%,

•

a Tier 1 risk-based capital ratio of 6% (increased from 4%),

•

a total risk-based capital ratio of 8% (unchanged from current rules), and

•

a Tier 1 leverage ratio of 4% for all institutions.

The rules also established a "capital conservation buffer" of 2.5%, to be phased in over three years, above the new regulatory minimum risk-based capital ratios, and will result in the following minimum ratios once the capital conservation buffer is fully phased in:

•

a common equity Tier 1 risk-based capital ratio of 7.0%,

•

a Tier 1 risk-based capital ratio of 8.5%, and

•

a total risk-based capital ratio of 10.5%.

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The rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. Bancorp opted out of this requirement.

As of March 31, 2016, Bancorp meets the requirements to be considered well capitalized under the new rules, and is not subject to limitations due to the capital conservation buffer.

e)	Non-GAAP Financial Measures

In addition to capital ratios defined by banking regulators, Bancorp considers various ratios when evaluating capital adequacy, including tangible common equity to tangible assets, and tangible common equity per share, all of which are non-GAAP measures. Bancorp believes these ratios are important because of their widespread use by investors as means to evaluate capital adequacy, as they reflect the level of capital available to withstand unexpected market conditions. Because US GAAP does not include capital ratio measures, there are no US GAAP financial measures comparable to these ratios.

The following table reconciles Bancorp’s calculation of measures to amounts reported under US GAAP.

(in thousands, except per share data)	March 31, 2016			December 31, 2015
Total equity	$	296,323		$	286,519
Less core deposit intangible		(1,549	)		(1,601	)
Less goodwill		(682	)		(682	)
Tangible common equity	$	294,092		$	284,236

Total assets	$	2,824,107		$	2,816,801
Less core deposit intangible		(1,549	)		(1,601	)
Less goodwill		(682	)		(682	)
Total tangible assets	$	2,821,876		$	2,814,518

Total shareholders' equity to total assets		10.49	%		10.17	%
Tangible common equity ratio		10.42			10.10

Number of outstanding shares		14,985			14,919

Book value per share	$	19.77		$	19.20
Tangible common equity per share		19.63			19.05

The efficiency ratio is normally used by investors to analyze a bank’s overhead as a percentage of its revenue. In addition to the efficiency ratio normally presented, Bancorp considers an adjusted efficiency ratio which is a non-GAAP measure. Bancorp believes excluding amortization of investments in tax credit partnerships from non-interest expense in this ratio is important because it provides a meaningful comparison to both prior periods and to other companies who do not invest in these partnerships.

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The following table reconciles Bancorp’s calculation of this measures to the ratio reported under US GAAP.

	Three months ended March 31,
(amounts in thousands)	2016			2015
Non-interest expense	$	19,540		$	17,779

Net interest income (tax-equivalent)		23,688			21,849
Non-interest income		10,082			9,673
Total revenue	$	33,770		$	31,522

Efficiency ratio		57.86	%		56.40	%

(amounts in thousands)	2016			2015
Non-interest expense	$	19,540		$	17,779
Less: amortization of investments in tax credit partnerships		(1,015	)		(158	)
Adjusted non-interest expense		18,525			17,621

Net interest income (tax-equivalent)		23,688			21,849
Non-interest income		10,082			9,673
Total revenue	$	33,770		$	31,522

Adjusted efficiency ratio		54.86	%		55.90	%

f)	Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for use in accounting for revenue arising from contracts with customers, and supersedes most current revenue recognition guidance. The ASU was originally effective for fiscal years and interim periods beginning after December 15, 2016. In August 2015, FASB issued ASU 2015-14 which delays the effective date. The effective date will be annual reporting periods beginning after December 15, 2017, and the interim periods within that year. Bancorp is still evaluating the potential impact of adoption of ASU 2014-09.

In February 2016, FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendment should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. Bancorp is currently evaluating the potential impact of adoption of ASU 2016-02.

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In March 2016, FASB issued ASU No. 2016-09, Compensation – Stock Compensation. The new guidance simplifies certain aspects related to income taxes, statement of cash flows, and forfeitures when accounting for share-based payment transactions. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2016. Certain of the amendments related to timing of the recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to the presentation of the statement of cash flows should be applied retrospectively. All other provisions may be applied on a prospective or modified retrospective basis. Bancorp is currently evaluating the potential impact of adoption of ASU 2016-09.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information required by this item is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. Controls and Procedures

Bancorp maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in reports it files with the Securities and Exchange Commission (“SEC”), and to record, process, summarize and report this information within the time periods specified in the rules and forms of the SEC. Based on their evaluation of Bancorp’s disclosure controls and procedures as of the end of the quarterly period covered by this report, the Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that Bancorp is able to collect, process and disclose the information it is required to disclose in reports it files with the SEC within the required time periods.

Based on the evaluation of Bancorp’s disclosure controls and procedures by the Chief Executive and Chief Financial Officers, there were no significant changes during the quarter ended March 31, 2016 in Bancorp’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Bancorp’s internal control over financial reporting.

PART II – OTHER INFORMATION

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

The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended March 31, 2016.

	Total number of shares purchased (1)		Average price paid per share		Total number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
January 1 - January 31		—	$	—		—		—
February 1 - February 29		7,883		37.03		—		—
March 1 - March 31		18,984		38.28		—		—
Total		26,867	$	37.91		—		—

(1)	Activity represents shares of stock withheld to pay taxes due upon vesting of restricted stock or share-based awards.

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Item 6. Exhibits

The following exhibits are filed or furnished as a part of this report:

Exhibit

Number		Description of exhibit
31.1		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act by David P. Heintzman
31.2		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act by Nancy B. Davis
32		Certifications pursuant to 18 U.S.C. Section 1350

101		The following financial statements from the Stock Yards Bancorp, Inc. March 31, 2016 Quarterly Report on Form 10-Q, filed on May 6, 2016, formatted in eXtensible Business Reporting Language (XBRL):

(1)

Consolidated Balance Sheets

(2)

Consolidated Statements of Income

(3)

Consolidated Statements of Comprehensive Income

(4)

Consolidated Statements of Changes in Stockholders’ Equity

(5)

Consolidated Statements of Cash Flows

(6)

Notes to Consolidated Financial Statements

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STOCK YARDS BANCORP, INC.


Date: May 6, 2016	By:	/s/ David P. Heintzman
		David P. Heintzman, Chairman
		and Chief Executive Officer

Date: May 6, 2016	By:	/s/ Nancy B. Davis
		Nancy B. Davis, Executive Vice President,
		Treasurer and Chief Financial Officer