UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑

☒Quarterly ~~Report Pursuant~~ toreport pursuant to Section 13 o~~r 15(~~d) of theor 15(d) of the Securities Exchange Act o~~f 1934.~~of 1934

For the quarterly period ended June 30, ~~201~~82019

ORor

☐

Transition ~~Report Pursuant~~ toreport pursuant to Section 13 o~~r 15(~~d) of theor 15(d) of the Securities Exchange Act ofof 1934

~~For the transition period from __________________ to ____________________.~~Commission File Number: 1-13661

~~Commission file number~~ ~~1-13661~~

STOCK YARDS BANCORP, INC.~~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)		(I.R.S. Employer Identification No.)

1040 East Main Street, Louisville, Kentucky		40206
(Address of principal executive ~~offices including zip code)~~offices)		(Zip Code)

Registrant’s telephone number, including area code: (502) 582-2571

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, no par value	SYBT	The NASDAQ Stock Market, LLC
~~(502) 582-2571~~
~~(Registrant’s telephone number, including area code)~~

~~Not Applicable~~
~~(Former name, former address and former fiscal year, if changed since last report)~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☑☐ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ☒ Yes ☑ ☐ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated ~~filer”,~~filer,” “accelerated ~~filer”,~~filer,” “smaller reporting ~~company”,~~company,” and “emerging growth company” in Rule 12b-2 of the Exchange ~~Act:~~Act.


Large accelerated filer ☒	☑	Accelerated filer ☐		Non-accelerated filer ☐	Smaller reporting company ☐
~~Non-accelerated filer~~ ~~(Do not check if a smaller reporting Company)~~	☐	~~Smaller reporting~~ c~~ompany~~	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange ~~Act.)~~Act).

☐ Yes ☐☒ No ☑

The number of shares outstanding of the registrant’s Common Stock, no par value, outstanding as of July ~~23, 2018~~31, 2019, was ~~22,747,342.~~22,723,643.

Table of Contents

Stock Yards Bancorp, inc. and subsidiary

~~Index~~

TABLE OF CONTENTS

Item	Page

part I – financial information		2


Item 1. Financial Statements.	~~Financial Statements~~	34

~~The following consolidated financial statements of Stock Yards Bancorp, Inc. and Subsidiary are submitted herewith:~~

	~~Consolidated Balance Sheets June 30, 2018 (Unaudited) and December 31, 2017~~	3

	~~Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2018 and 2017~~	4

	~~Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2018 and 2017~~	5

	~~Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the six months ended June 30, 2018 and 2017~~	6

	~~Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2018 and 2017~~	7

	~~Notes to Consolidated Financial Statements (Unaudited)~~	8


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations.	4752

Item 3.	Quantitative and Qualitative Disclosures about Market ~~Risk~~Risk.	70

~~Item 4.~~	~~Controls and Procedures~~	70


~~part II – other information~~		7175

Item 4. Controls and Procedures.	75


PART II – OTHER INFORMATION


Item 1. Legal Proceedings	76

Item 2.	Unregistered Sales of Equity Securities and Use of ~~Proceeds~~Proceeds.	7176

Item 6. Exhibits.	77

~~Item 6.~~ SIGNATURES	~~Exhibits~~	71

Table of Contents

Stock Yards Bancorp, inc. and subsidiary

~~Index~~

PART I – FINANCIAL INFORMATION

Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:

Acronym		Definition		Acronym	Definition
AFS		Available for sale		HELOC	Home equity line of credit
Allowance		Allowance for loan and lease losses		HTM	Held to maturity
ASC		Accounting Standards Codification		King	King Bancorp, Inc.
ASU		Accounting Standards Update		KSBT	King Bancorp Statutory Trust I
AUM		Assets under management		LIBOR	London Interbank Offering Rate
Bancorp		Stock Yards Bancorp, Inc.		Loans	Loans and leases
Bank		Stock Yards Bank & Trust ~~Company~~Co.		MSA	Metropolitan statistical area
BOLI		Bank ~~Owned Life Insurance~~owned life insurance		MSR	Mortgage servicing right
BPBPS		Basis ~~Point~~point = 1/100^th of one percent		NA	Not applicable
C&D		Construction and development		OAEM	Other assets especially mentioned
C&I		Commercial and industrial		OCI	Other comprehensive income
CECL		Current Expected Credit Losses		OREO	Other real estate owned
CEO		Chief Executive Officer		OTTI	Other than temporarily impaired
COSO		Committee of Sponsoring Organizations		PCI	Purchased credit impaired
CRA		Community Reinvestment Act of 1977		Provision	Provision for loan and lease losses
CRE		Commercial real estate		PSU	Performance stock unit
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act		ROA	Return on average assets
EPS		Earnings ~~Per Share~~per share		ROE	Return on average equity
EVP		Executive Vice President		RSA	Restricted stock award
FASB		Financial Accounting Standards Board		RSU	Restricted stock unit
FDIC		Federal Deposit Insurance Corporation		SAR	Stock appreciate right
FHA	~~Federal Housing Administration~~
~~FHLB~~	Federal ~~Home Loan Bank~~
~~FHLMC~~housing Administration	~~Federal Home Loan Mortgage Corporation~~
~~FNMA~~	~~Federal National Mortgage Association~~
~~GNMA~~	~~Government National Mortgage Association~~
~~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
FHLB		Federal Home Loan Bank		SSUAR	Securities sold under agreements to repurchase
FHLMC		Federal Home Loan Mortgage Corporation		TBOC	THE Bank of Oldham County
FNMA		Federal National Mortgage Association		TCE	Tangible common equity
FRB		Federal Reserve Bank		TDR	Troubled Debt Restructuring
US GAAP		~~United States~~U.S. Generally Accepted Accounting Principles
	VA		U.S. Department of Veterans Affairs
GNMA		Government National Mortgage Association		WM&T	Wealth Management and Trust

Table of Contents

Stock Yards Bancorp, inc. and subsidiary

Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
June 30, 2019 (unaudited) and December 31, 2018

(In thousands, except share data)
	June 30,		December 31,
	2019		2018
Assets
Cash and due from banks	$	51,264	$	51,892
Federal funds sold and interest bearing due from banks		64,775		147,047
Cash and cash equivalents		116,039		198,939
Mortgage loans held for sale		3,922		1,675
Securities available for sale		423,579		436,995
Federal Home Loan Bank stock, at cost		11,316		10,370
Loans and leases		2,763,880		2,548,171
Allowance for loan and lease losses		26,416		25,534
Net loans and leases		2,737,464		2,522,637

Premises and equipment, net		65,069		44,764
Bank owned life insurance		32,631		32,273
Accrued interest receivable		9,633		8,360
Goodwill		12,826		682
Core deposit intangible		2,461		1,057
Other assets		48,883		45,172
Total assets	$	3,463,823	$	3,302,924

Liabilities
Deposits:
Non-interest bearing	$	777,652	$	711,023
Interest bearing		2,105,801		2,083,333
Total deposits		2,883,453		2,794,356

Securities sold under agreements to repurchase		33,809		36,094
Federal funds purchased		12,012		10,247
Federal Home Loan Bank advances		84,279		48,177
Accrued interest payable		1,008		762
Other liabilities		59,897		46,788
Total liabilities		3,074,458		2,936,424

Commitments and contingent liabilities (note 15)		—		—

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 22,721,027 and 22,749,139 shares in 2019 and 2018, respectively		36,596		36,689
Additional paid-in capital		37,776		36,797
Retained earnings		313,927		298,156
Accumulated other comprehensive income (loss)		1,066		(5,142	)
Total stockholders’ equity		389,365		366,500
Total liabilities and stockholders’ equity	$	3,463,823	$	3,302,924

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the three and six months ended June 30, 2019 and 2018

	Three months ended				Six months ended
(In thousands, except per share data)	June 30,				June 30,
	2019		2018		2019		2018
Interest income:
Loans and leases	$	33,419	$	29,456	$	64,963	$	56,518
Federal funds sold and interest bearing due from banks		830		163		1,563		431
Mortgage loans held for sale		43		44		80		79
Securities available for sale
Taxable		2,546		2,105		5,114		4,243
Tax-exempt		130		236		277		477
Total interest income		36,968		32,004		71,997		61,748
Interest expense:
Deposits		5,652		2,674		10,718		4,751
Securities sold under agreements to repurchase		28		30		53		67
Federal funds purchased and other short-term borrowing		64		397		124		483
Federal Home Loan Bank advances		424		229		645		464
Subordinated debentures		26		—		26		—
Total interest expense		6,194		3,330		11,566		5,765
Net interest income		30,774		28,674		60,431		55,983
Provision for loan and lease losses		—		1,235		600		1,970
Net interest income after provision		30,774		27,439		59,831		54,013
Non-interest income:
Wealth management and trust services		5,662		5,344		11,101		10,844
Deposit service charges		1,336		1,447		2,583		2,858
Debit and credit card income		2,168		1,689		3,912		3,197
Treasury management fees		1,202		1,113		2,359		2,160
Mortgage banking income		796		746		1,278		1,322
Net investment product sales commissions and fees		364		397		720		801
Bank owned life insurance		184		191		362		378
Other		551		508		1,010		784
Total non-interest income		12,263		11,435		23,325		22,344
Non-interest expenses:
Compensation		12,715		11,703		24,516		22,673
Employee benefits		2,908		2,512		5,550		5,145
Net occupancy and equipment		1,976		1,811		3,834		3,629
Technology and communication		1,848		1,685		3,621		3,315
Debit and credit card processing		631		579		1,218		1,145
Marketing and business development		903		805		1,528		1,451
Postage, printing, and supplies		410		400		816		791
Legal and professional		1,523		504		2,057		997
FDIC insurance		248		238		486		480
Amortization/impairment of investments in tax credit partnerships		52		58		104		58
Capital and deposit based taxes		967		862		1,871		1,714
Other		1,283		979		2,502		1,765
Total non-interest expenses		25,464		22,136		48,103		43,163
Income before income tax expense		17,573		16,738		35,053		33,194
Income tax expense		1,030		3,159		2,869		6,211
Net income	$	16,543	$	13,579	$	32,184	$	26,983
Net income per share, basic	$	0.73	$	0.60	$	1.42	$	1.19
Net income per share, diluted	$	0.72	$	0.59	$	1.40	$	1.17
Weighted average common shares:
Basic		22,689		22,625		22,675		22,601
Diluted		22,949		22,967		22,948		22,959

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

For the three and six months ended June 30, 2019 and 2018

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2019			2018			2019			2018

Net income	$	16,543		$	13,579		$	32,184		$	26,983
Other comprehensive income:
Change in unrealized gain (loss) on available for sale debt securities		5,021			(1,618	)		8,446			(6,325	)
Change in fair value of derivatives used in cash flow hedges		(321	)		99			(530	)		491
Total other comprehensive income (loss), before income tax		4,700			(1,519	)		7,916			(5,834	)
Tax effect		1,121			(319	)		1,708			(1,226	)
Total other comprehensive income (loss), net of tax		3,579			(1,200	)		6,208			(4,608	)
Comprehensive income	$	20,122		$	12,379		$	38,392		$	22,375

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
For the six months ended June 30, 2019 with quarterly subtotals

													Accumulated
	Common stock						Additional						other			Total
	Number of						paid-in			Retained			comprehensive			stockholders'
(In thousands, except per share data)	shares			Amount			capital			earnings			income (loss)			equity

Balance, January 1, 2019		22,749		$	36,689		$	36,797		$	298,156		$	(5,142	)	$	366,500

Activity for three months ended March 31, 2019:

Net income		—			—			—			15,641			—			15,641

Net change in accumulated other comprehensive income (loss)		—			—			—			—			2,629			2,629

Stock compensation expense		—			—			863			—			—			863

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		74			245			2,254			(4,452	)		—			(1,953	)

Cash dividends declared, $0.25 per share		—			—			—			(5,686	)		—			(5,686	)

Balance, March 31, 2019		22,823		$	36,934		$	39,914		$	303,659		$	(2,513	)	$	377,994

Activity for three months ended June 30, 2019:

Net income		—			—			—			16,543			—			16,543

Net change in accumulated other comprehensive income (loss)		—			—			—			—			3,579			3,579

Stock compensation expense		—			—			993			—			—			993

Common stock repurchased		(107	)		(357	)		(3,308	)		—			—			(3,665	)

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		5			19			182			(363	)		—			(162	)

Cash dividends declared, $0.26 per share		—			—			—			(5,917	)		—			(5,917	)

Shares cancelled		—			—			(5	)		5			—			—

Balance, June 30, 2019		22,721		$	36,596		$	37,776		$	313,927		$	1,066		$	389,365

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

~~Item 1.~~ ~~Financial Statements~~
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
For the six months ended June 30, 2018 with quarterly subtotals

													Accumulated
	Common stock						Additional						other			Total
	Number of						paid-in			Retained			comprehensive			stockholders'
(In thousands, except per share data)	shares			Amount			capital			earnings			loss			Total

Balance, January 1, 2018		22,679		$	36,457		$	31,924		$	267,193		$	(1,930	)	$	333,644

Activity for three months ended March 31, 2018:

Net income		—			—			—			13,404			—			13,404

Net change in accumulated other comprehensive loss		—			—			—			—			(3,408	)		(3,408	)

Reclassification adjustment under Accounting Standards Update 2018-02		—			—			—			506			(506	)		—

Stock compensation expense		—			—			823			—			—			823

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		52			174			205			(1,914	)		—			(1,535	)

Cash dividends declared, $0.23 per share		—			—			—			(5,226	)		—			(5,226	)

Shares cancelled		(1	)		(4	)		(35	)		39			—			—

Balance, March 31, 2018		22,730		$	36,627		$	32,917		$	274,002		$	(5,844	)	$	337,702

Activity for three months ended June 30, 2018:

Net income		—			—			—			13,579			—			13,579

Net change in accumulated other comprehensive loss		—			—			—			—			(1,200	)		(1,200	)

Stock compensation expense		—			—			1,212			—			—			1,212

Repurchase of common stock		—			—			—			—			—			—

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award		17			57			618			(1,226	)		—			(551	)

Cash dividends declared, $0.23 per share		—			—			—			(5,227	)		—			(5,227	)

Shares cancelled		(1	)		(4	)		(32	)		36			—			—

Balance, June 30, 2018		22,746		$	36,680		$	34,715		$	281,164		$	(7,044	)	$	345,515

~~STOCK YARDS BANCORP, INC. AND SUBSIDIARY~~

~~Consolidated Balance Sheets~~

~~June 30, 2018 (unaudited) and December 31, 2017~~

~~(In thousands, except share data)~~
See accompanying notes to unaudited consolidated financial statements.

June 30,

December 31,

2018

2017

Assets

Cash and due from banks
$ 44,052 $ 41,982
Federal funds sold and interest bearing due from banks
10,948 97,266
Cash and cash equivalents
55,000 139,248
Mortgage loans held for sale
2,053 2,964
Securities available-for-sale (amortized cost of $583,777 in 2018 and $577,406 in 2017)
574,570 574,524
Federal Home Loan Bank stock
10,370 7,646
Loans
2,577,960 2,409,570
Less allowance for loan losses
24,873 24,885
Net loans
2,553,087 2,384,685
Premises and equipment, net
42,354 41,655
Bank owned life insurance
32,427 32,049
Accrued interest receivable
8,743 8,369
Other assets
45,236 48,506
Total assets
$ 3,323,840 $ 3,239,646

Liabilities and Stockholders’ Equity

Deposits:

Non-interest bearing
$ 715,974 $ 674,697
Interest bearing
1,824,487 1,903,598
Total deposits
2,540,461 2,578,295
Securities sold under agreements to repurchase
58,808 70,473
Federal funds purchased and other short-term borrowing
286,460 161,352
Federal Home Loan Bank advances
48,821 49,458
Accrued interest payable
500 232
Other liabilities
43,275 46,192
Total liabilities
2,978,325 2,906,002
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 22,746,283 and 22,679,362 shares in 2018 and 2017, respectively
36,680 36,457
Additional paid-in capital
34,715 31,924
Retained earnings
281,164 267,193
Accumulated other comprehensive loss
(7,044 ) (1,930 )
Total stockholders’ equity
345,515 333,644
Total liabilities and stockholders’ equity
$ 3,323,840 $ 3,239,646

Table of Contents

CONSOLIDATED STATEMENTS OF CASHFLOWS (Unaudited)
For the six months ended June 30, 2019 and 2018

~~See accompanying notes to unaudited consolidated financial statements.~~

(In thousands)	2019			2018
Operating activities:
Net income	$	32,184		$	26,983
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		600			1,970
Depreciation, amortization and accretion, net		1,679			2,680
Deferred income tax (benefit) expense		(3,959	)		40
Gain on sales of mortgage loans held for sale		(719	)		(769	)
Origination of mortgage loans held for sale		(38,081	)		(37,803	)
Proceeds from sale of mortgage loans held for sale		36,553			39,483
Bank owned life insurance income		(362	)		(378	)
Loss (gain) on the disposal of premises and equipment		6			(14	)
Gain on the sale of other real estate		(63	)		(109	)
Stock compensation expense		1,856			2,035
Excess tax benefits from share-based compensation arrangements		(392	)		(525	)
Net change in accrued interest receivable and other assets		(3,429	)		2,236
Net change in accrued interest payable and other liabilities		(3,974	)		247
Net cash provided by operating activities		21,899			36,076
Investing activities:
Purchases of securities available for sale		(373,761	)		(399,911	)
Proceeds from sales of securities		12,427			—
Proceeds from maturities and paydowns of securities available for sale		396,367			392,855
Purchase of Federal Home Loan Bank stock		—			(2,724	)
Proceeds from redemptions of Federal Home Loan Bank stock		591			—
Proceeds from redemption of Federal Reserve Bank stock		490			—
Proceeds from redemption of interest bearing due from banks		1,761			—
Net change in loans		(49,280	)		(170,843	)
Purchases of premises and equipment		(3,321	)		(2,694	)
Proceeds from disposal of premises and equipment		45			230
Proceeds from surrender of acquired bank bank owned life insurance		3,431			—
Proceeds from bank owned life insurance mortality benefit		909			—
Other investment activities		(1,532	)		(2,542	)
Proceeds from sale of foreclosed assets		868			2,860
Cash for acquisition, net of cash acquired		(24,684	)		—
Net cash used in investing activities		(35,689	)		(182,769	)
Financing activities:
Net change in deposits		(36,464	)		(37,834	)
Net change in securities sold under agreements to repurchase and federal funds purchased		(2,086	)		113,443
Proceeds from Federal Home Loan Bank advances		60,000			60,000
Repayments of Federal Home Loan Bank advances		(67,250	)		(60,637	)
Repayment of acquired bank holding company line of credit		(2,300	)		—
Redemption of acquired bank subordinated debentures		(3,609	)		—
Common stock repurchases		(5,780	)		(2,086	)
Cash dividends paid		(11,621	)		(10,441	)
Net cash provided by (used in) financing activities		(69,110	)		62,445
Net change in cash and cash equivalents		(82,900	)		(84,248	)
Cash and cash equivalents at beginning of period		198,939			139,248
Cash and cash equivalents at end of period	$	116,039		$	55,000

(continued)

Table of Contents

~~STOCK YARDS BANCORP, INC. AND SUBSIDIARY~~

~~Consolidated Statements of Income~~
CONSOLIDATED STATEMENTS OF CASHFLOWS (continued) (Unaudited)
~~For the three and six months ended June 30, 2018 and 2017~~
~~(In thousands, except per share data)~~
For the six months ended June 30, 2019 and 2018

For three months ended

For six months ended

June 30,

June 30,

2018

2017

2018

2017

Interest income

Loans
$ 29,456 $ 24,364 $ 56,518 $ 48,446
Federal funds sold and interest bearing deposits
163 276 431 410
Mortgage loans held for sale
44 53 79 97
Securities

Taxable
2,105 2,056 4,243 4,170
Tax-exempt
236 277 477 558
Total Interest income
32,004 27,026 61,748 53,681
Interest expense

Deposits
2,674 1,481 4,751 2,644
Securities sold under agreements to repurchase and other short-term borrowings
427 61 550 115
Long term debt
229 239 464 471
Total interest expense
3,330 1,781 5,765 3,230
Net interest income
28,674 25,245 55,983 50,451
Provision for loan losses
1,235 600 1,970 1,500
Net interest income after provision for loan losses
27,439 24,645 54,013 48,951
Non-interest income

Wealth management and trust services
5,344 5,153 10,844 10,247
Deposit service charges
1,447 1,516 2,858 3,015
Debit and credit cards
1,689 1,514 3,197 2,920
Treasury management
1,113 1,082 2,160 2,104
Mortgage banking
746 897 1,322 1,599
Net investment product sales commissions and fees
397 357 801 743
Bank owned life insurance
191 556 378 760
Other
508 450 784 759
Total non-interest income
11,435 11,525 22,344 22,147
Non-interest expenses

Compensation
11,703 10,566 22,673 21,235
Employee benefits
2,512 2,282 5,145 5,024
Net occupancy and equipment
1,811 1,782 3,629 3,689
Technology and communication
2,264 2,120 4,460 3,968
Marketing and business development
805 687 1,451 1,132
Postage, printing and supplies
400 382 791 753
Legal and professional
504 642 997 1,071
FDIC insurance
238 244 480 474
Amortization/impairment of investments in tax credit partnerships
58 615 58 1,231
Capital and deposit based taxes
862 766 1,714 1,530
Other
979 1,123 1,765 2,097
Total non-interest expense
22,136 21,209 43,163 42,204
Income before income taxes
16,738 14,961 33,194 28,894
Income tax expense
3,159 4,359 6,211 7,501
Net income
$ 13,579 $ 10,602 $ 26,983 $ 21,393
Net income per share

Basic
$ 0.60 $ 0.47 $ 1.19 $ 0.95
Diluted
$ 0.59 $ 0.46 $ 1.17 $ 0.93
Average common shares

Basic
22,625 22,538 22,601 22,515
Diluted
22,979 22,996 22,975 22,998

(In thousands)	2019		2018
Supplemental cash flow information:
Cash paid during the period for:
Income tax payments, net of refunds	$	5,382	$	1,800
Cash paid for interest		11,320		5,497
Supplemental non-cash activity:
Initital recognition of right-of-use lease assets	$	16,747	$	—
Initital recognition operating lease liabilities		18,067		—
Transfers from loans to real estate acquired in settlement of loans		—		471

Liabilities assumed in conjunction with King Bancorp acquisition:
Fair value of assets acquired	$	204,613	$	—
Cash paid in acqusition		28,000		—
Liabilities assumed	$	176,613	$	—

See accompanying notes to unaudited consolidated financial statements.

~~See accompanying notes to unaudited consolidated financial statements~~

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~~STOCK YARDS BANCORP, INC. AND SUBSIDIARY~~

~~Consolidated Statements of Comprehensive Income (Unaudited)~~

~~For the three and six months ended June 30, 2018 and 2017~~

~~(In thousands)~~

Three months ended

Six months ended

June 30,

June 30,

2018

2017

2018

2017

Net income
$ 13,579 $ 10,602 $ 26,983 $ 21,393
Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on securities available for sale:

Unrealized (losses) gains arising during the period (net of tax of ($339), $112, (1,328), and $482, respectively)
(1,279 ) 206 (4,997 ) 895
Unrealized losses on hedging instruments:

Unrealized gains (losses) arising during the period (net of tax of $20, ($49), $102, and ($2), respectively)
79 (90 ) 389 (5 )
Other comprehensive income (loss), net of tax
(1,200 ) 116 (4,608 ) 890
Comprehensive income
$ 12,379 $ 10,718 $ 22,375 $ 22,283

~~See accompanying notes to unaudited consolidated financial statements~~

~~Table of Contents~~

~~STOCK YARDS BANCORP, INC. AND SUBSIDIARY~~

~~Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)~~

~~For the six months ended June 30, 2018 and 2017~~

~~(In thousands, except per share data)~~

Accumulated

Common stock

Additional

other

Number of

paid-in

Retained

comprehensive

shares

Amount

capital

earnings

income (loss)

Total

Balance December 31, 2016
22,617 36,250 26,682 252,439 (1,499 ) 313,872

Net income
- - - 21,393 - 21,393

Other comprehensive income, net of tax
- - - - 890 890

Stock compensation expense
- - 1,342 - - 1,342

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award
50 164 1,820 (4,146 ) - (2,162 )

Cash dividends, $0.39 per share
- - - (8,835 ) - (8,835 )

Shares cancelled
(5 ) (14 ) (91 ) 105 - -

Balance June 30, 2017
22,662 $ 36,400 $ 29,753 $ 260,956 $ (609 ) $ 326,500

Balance December 31, 2017
22,679 36,457 31,924 267,193 (1,930 ) 333,644

Net income
- - - 26,983 - 26,983

Other comprehensive income, net of tax
- - - - (4,608 ) (4,608 )

Reclassification adjustment under Accounting Standard Update 2018-02
506 (506 ) -

Stock compensation expense
- - 2,035 - - 2,035

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award
69 231 823 (3,140 ) - (2,086 )

Cash dividends, $0.46 per share
- - - (10,453 ) - (10,453 )

Shares cancelled
(2 ) (8 ) (67 ) 75 - -

Balance June 30, 2018
22,746 $ 36,680 $ 34,715 $ 281,164 $ (7,044 ) $ 345,515

~~See accompanying notes to unaudited consolidated financial statements.~~

~~Table of Contents~~

~~STOCK YARDS BANCORP, INC. AND SUBSIDIARY~~

~~Consolidated Statements of Cash Flows (Unaudited)~~

~~For the three months ended June 30, 2018 and 2017~~

~~(In thousands)~~

2018
2017
Operating activities:

Net income
$ 26,983 $ 21,393
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses
1,970 1,500
Depreciation, amortization and accretion, net
2,680 4,399
Deferred income tax provision
40 (517 )
Gain on sales of mortgage loans held for sale
(769 ) (963 )
Origination of mortgage loans held for sale
(37,803 ) (49,168 )
Proceeds from sale of mortgage loans held for sale
39,483 50,289
Bank owned life insurance income
(378 ) (760 )
Gain on the disposal of premises and equipment
(14 ) -
(Gain) loss on the sale of other real estate
(109 ) 64
Stock compensation expense
2,035 1,342
Excess tax benefits from share-based compensation arrangements
(525 ) (1,120 )
Decrease (increase) in accrued interest receivable and other assets
2,077 (4,015 )
(Decrease) increase in accrued interest payable and other liabilities
(2,136 ) 6,883

Net cash provided by operating activities
33,534 29,327

Investing activities:

Purchases of securities available for sale
(399,911 ) (251,196 )
Proceeds from maturities of securities available for sale
392,855 245,010
Purchases of Federal Home Loan Bank stock
(2,724 ) (1,319 )
Net increase in loans
(170,843 ) (4,685 )
Purchases of premises and equipment
(2,694 ) (839 )
Proceeds from disposal of premises and equipment
230 207
Proceeds from mortality benefit of bank owned life insurance
— 970
Proceeds from sale of foreclosed assets
2,860 1,784

Net cash used in investing activities
(180,227 ) (10,068 )

Financing activities:

Net decrease in deposits
(37,834 ) (42,002 )
Net increase in securities sold under agreements to repurchase and federal funds purchased
113,443 111,518
Proceeds from Federal Home Loan Bank advances
60,000 60,000
Repayments of Federal Home Loan Bank advances
(60,637 ) (60,642 )
Repurchase common stock for performance stock units
(155 ) (216 )
Common stock repurchases of restricted shares surrendered for taxes
(1,931 ) (1,946 )
Cash dividends paid
(10,441 ) (8,819 )

Net cash provided by financing activities
62,445 57,893

Net (decrease) increase in cash and cash equivalents
(84,248 ) 77,152
Cash and cash equivalents at beginning of period
139,248 47,973

Cash and cash equivalents at end of period
$ 55,000 $ 125,125
Supplemental cash flow information:

Income tax payments
$ 1,800 $ 4,473
Cash paid for interest
5,497 3,187
Supplemental non-cash activity:

Transfers from loans to other real estate owned
$ 471 $ -

~~See accompanying notes to unaudited consolidated financial statements.~~

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~~Stock Yards Bancorp, inc. and subsidiary~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Notes to Consolidated Financial Statements~~ (Unaudited)

~~(1)~~(1)

Basis of Presentation and 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 statementsBasis 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.

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

As a result of its acquisition of King, Bancorp, Inc. on May 1, 2019, Bancorp became the 100% successor owner of King Bancorp Statutory Trust I (“KBST”), an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the trust-preferred securities at the par amount of approximately $3.6 million on June 17, 2019.

The Bank, chartered in 1904, is a Louisville, Kentucky-based, state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio Metropolitan Statistical Areas (“MSAs”) through 43 full service banking center locations.

As of June 30, 2019, Bancorp was divided into two reportable segments: Commercial Banking and Wealth Management & Trust (“WM&T”):

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

WM&T, with over $3 billion in assets under management (“AUM”), provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31,2019. For further information, refer to the consolidated financial statements and notes thereto included in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain reclassifications have been made in the prior year financial statements to conform to current year classifications.

Significant Accounting Policies - In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenues and expenses during the reporting period. Actual results could differ from those estimates. 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~~Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2017 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.~~2018.

~~Interim results~~Critical Accounting Policies - An allowance has been established to provide for probable losses on loans that may not be fully repaid. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries. Loans are typically charged off when management deems them uncollectible and after underlying collateral has been liquidated; however, collection efforts continue and future recoveries may occur. Periodically, loans are partially charged off to the ~~six month period ended June 30, 2018 are not necessarily indicative~~net realizable value based upon evaluation of ~~the results for the entire year.~~related underlying collateral, including Bancorp’s expectation of resolution.

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~~Critical Accounting Policies~~

The allowance ~~for loan losses~~methodology 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.

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 for loan losses reflects an allowance methodology driven by risk ratings, historical losses, ~~specific loan loss allocations,~~ and qualitative factors. ~~Assumptions include many~~The level of the June 30, 2019 allowance reflected a number of factors, ~~such as changes in borrowers’ financial condition~~including credit quality metrics which ~~can change quickly or historical loss ratios related to certain loan portfolios which may or may not be indicative~~were generally consistent with prior periods, and expansion of ~~future losses. Consistent with Bancorp’s methodology, in the first quarter of 2018, Bancorp extended~~ the historical look-back period ~~used~~from 32 to ~~capture Bancorp’s historical loss ratios from 28 quarters to 32~~36 quarters in ~~order to capture the effects~~ March of ~~a full economic cycle.~~2019. This ~~extension~~expansion of the historical period was applied to all classes and segments of ~~our~~the portfolio. Expansion of the look-back period for historical loss rates used in the quantitative allocation caused review of the overall methodology for qualitative factors to ensure we were appropriately capturing risk not addressed in the quantitative historical loss rate. Management believes ~~the~~ extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio.

~~By extending~~ Based on the look-back period ~~to 32 quarters to capture historical loss data for a full economic cycle,~~extension, the allowance level increased approximately ~~$1.3~~$2.0 million ~~compared with a 28 quarter look-back period as~~for 2019. Key indicators of ~~March 31, 2018. The change in look-back period was~~loan quality continued to trend at levels consistent with ~~management’s judgment regarding~~prior periods, however management recognizes that due to the risk in the loan portfolio and consistent with internal analysis showing continued strong asset quality related not only in the Company’s loan portfolio, but the Bank’s peer group as well, validating the continuationcyclical nature of the ~~current economic cycle and thus~~lending business, these trends will likely normalize over the ~~reasoning to extend~~long term. Additional information regarding Bancorp’s methodology for evaluating the ~~look-back period. Management will continue to evaluate the appropriateness~~adequacy of the ~~look-back period based~~allowance can be read in Bancorp’s Annual Report on Form 10-K.

Accounting Standards Updates (“ASUs”)

The following ASU was issued prior to June 30, 2019 and is considered relevant to Bancorp’s financial statements. Generally, if an issued-but-not-yet-effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.

In June 2016, the ~~status~~Financial Accounting Standards Board (“FASB”) issued ASU 2016-13,Measurement of Credit Losses on Financial Instruments, (“CECL”). This ASU significantly changes the ~~economic cycle. To the extent that management’s assumptions prove incorrect, results from operations could be materially affected~~way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Bancorp expects to recognize a ~~higher or lower provision for loan losses. The accounting policy related~~one-time cumulative-effect adjustment to the allowance on January 1, 2020. Interagency guidance issued in December 2018 allows for ~~loan losses is applicable~~a three year phase-in of the cumulative-effect adjustment for regulatory capital reporting.

As a result of this ASU, Bancorp could experience an increase in its allowance. Bancorp has formed a committee to oversee its transition to the ~~commercial banking~~CECL methodology. Bancorp has devoted internal resources and purchased a third party software solution to analyze, compute and report upon the CECL disclosure requirements. In addition, Bancorp has analyzed loan-level data and is determining its CECL loan segmentation and initial segment calculation methodologies. Bancorp is currently exploring regression techniques and has begun to run forecasting scenarios.

Recently Adopted Accounting Standards

Bancorp adopted ASU 2016-02,Leases and related amendments using an alternative transition method, effective January 1, 2019 and upon adoption recorded $17 million of ~~Bancorp.~~right-of-use lease assets and $18 million of operating lease liabilities on its balance sheet as of June 30, 2019. Prior periods have not been restated. The right-of-use lease asset and operating lease liability are recorded in premises and equipment and other liabilities, respectively, on the consolidated balance sheet. Bancorp elected all applicable practical expedients, including the option to expense short-term leases, which are defined as leases with a term of one year or less. Bancorp also elected not to separate lease components from non-lease components.

The adoption of this ASU did not have a meaningful impact on Bancorp's performance metrics, including regulatory capital ratios and ~~any associated risks related~~return on average assets. Additionally, Bancorp does not believe that the adoption of this ASU by its clients will have a significant impact on Bancorp's ability to underwrite credit when client financial statements are presented inclusive of the requirements of this ~~policy~~ASU. See the note titled “Leases” for additional information on ~~Bancorp’s business operations are discussed in the “Allowance for Loan Losses” section below.~~lease activities.

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~~Stock Yards Bancorp, inc. and subsidiary~~

(2)

Acquisition of King Bancorp, Inc.

~~Bancorp’s allowance calculation includes allocations to loan portfolio segments at June 30, 2018~~On May 1, 2019, Bancorp completed its acquisition of King Bancorp, Inc, and its wholly-owned subsidiary King Southern Bank (“King”), for ~~qualitative factors including, among other factors, local economic and business conditions~~$28 million in ~~each of our primary markets, quality and experience of lending staff and management, exceptions to lending policies, levels of and trends~~cash. The acquisition expands the Company’s market area into nearby Nelson County, Kentucky, while growing its customer base in past due loans and loan classifications, concentrations of credit such as collateral type, trends in portfolio growth, trends in value of underlying collateral for collateral-dependent loans, effect of other external factors such as the national economic and business trends, quality and depth of the loan review function, and management’s judgement of current trends and potential risks. Bancorp utilizes the sum of all allowance amounts derived as described above as the appropriate level of allowance for loan and lease losses. Changes in criteria used in this evaluation or availability of new information could cause the allowance to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require adjustments to the allowance for loan and lease losses based on their judgments and estimates.Louisville, Kentucky.

~~(2)~~

~~Securities~~

The ~~amortized~~following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary fair values shown in the following table continue to be evaluated by management and may be subject to further adjustment.

Acquisition of King Bancorp, Inc.
Summary of Assets Aquired and Liabilities Assumed

	May 1, 2019
	As Recorded			Fair Value				As Recorded
(In thousands)	by King			Adjustments (1)				by Bancorp
Assets aquired:

Cash and due from banks	$	3,316		$	—			$	3,316
Interest bearing due from banks		1,761			—				1,761
Available for sale securities		12,404			23		a		12,427
Loans		165,744			(1,597	)	b		164,147
Allowance for loan and lease losses		(1,812	)		1,812		b		-
Loans, net		163,932			215				164,147
Federal Home Loan Bank stock, at cost		1,517			—				1,517
Federal Reserve Bank stock, at cost		490			—				490
Premises and equipment, net		4,358			(1,328	)	c		3,030
Core deposit intangible		—			1,519		d		1,519
Bank owned life insurance		3,431			—				3,431
Other real estate owned		325			(325	)	e		—
Other assets and accrued interest receivable		867			(36	)	f		831

Total assets acquired	$	192,401		$	68			$	192,469

Liabilities assumed:

Deposits
Non-interest bearing	$	24,939		$	—			$	24,939
Interest bearing		100,839			(252	)	g		100,587
Total deposits		125,778			(252	)			125,526

Federal funds purchased		1,566			—				1,566
Federal Home Loan Bank advances		43,718			(419	)	h		43,299
Subordinated Note		3,609			—				3,609
Holding Company line of credit		2,300			—				2,300
Other liabilities and accrued interest payable		313			—				313

Total liabilities assumed		177,284			(671	)			176,613

Net assets acquired	$	15,117		$	739			$	15,856

Cash consideration paid									(28,000	)

Goodwill								$	12,144

(1)

Bancorp’s acquisition of King closed on May 1, 2019. Accordingly, the fair value adjustments shown are preliminary estimates of the purchase accounting adjustments. Management is continuing to evaluate each of these fair value adjustments and may revise one or more of such fair value adjustments in future periods based on this continuing evaluation. To the extent that any of these preliminary fair value adjustments are revised in future periods, the resultant fair values and the amount of goodwill recorded by the Company will change.

Table of Contents

Explanation of fair value adjustments

	a.	Reflects the fair value adjustment based on Bancorp’s evaluation of the acquired investment portfolio.
	b.	Reflects the fair value adjustment based on Bancorp’s evaluation of the acquired loan portfolio and to eliminate King’s recorded allowance.
	c.	Reflects the fair value adjustment based on Bancorp’s evaluation of the premises and equipment acquired.

	d.	Reflects the fair value adjustment for the core deposit intangible asset recorded as a result of the acquisition.
	e.	Reflects the fair value adjustment based upon Bancorp’s evaluation of the foreclosed real estate acquired.
	f.	Reflects the write-off of a miscellaneous other asset.

Reflects the fair value adjustment based on the Company’s evaluation of the assumed time deposits.

Reflects the fair value adjustment based upon Bancorp’s evaluation of the assumed FHLB advances.

Goodwill of approximately $12 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, is expected to be recorded in the King acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Commercial Banking segment and is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the King acquisition will change. As a result of the King transaction, and based upon the proximity to existing branch locations, Bancorp expects to sell three acquired branch buildings in the third quarter of 2019, while retaining the associated customer relationships. These branches are considered held available for sale as of June 30, 2019. If consummated, goodwill will be adjusted in that period.

Revenue attributed to King totaled $1.6 million for the three and six months ended June 30, 2019. Prior year pro-forma financial statements were not presented due to the immateriality of the transaction.

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(3)

Securities

All of Bancorp’s securities are classified as available for sale. Amortized cost, unrealized gains and losses, and fair value of securities ~~available-for-sale follows:~~follow:

(In thousands)	Amortized		Unrealized					Fair		Amortized		Unrealized
June 30, 2018	cost		Gains		Losses			value
June 30, 2019										cost		Gains		Losses			Fair value

Government sponsored enterprise obligations	$	392,833	$	31	$	(4,268	)	$	388,596	$	266,579	$	1,755	$	(319	)	$	268,015
Mortgage-backed securities - government agencies		148,068		110		(5,043	)		143,135
Mortgage backed securities - government agencies											131,447		938		(787	)		131,598
Obligations of states and political subdivisions		42,876		202		(239	)		42,839		23,854		118		(6	)		23,966

Total securities available for sale	$	583,777	$	343	$	(9,550	)	$	574,570	$	421,880	$	2,811	$	(1,112	)	$	423,579

December 31, 2017

U.S. Treasury and other U.S. Government obligations	$	149,996	$	-	$	(12	)	$	149,984
December 31, 2018
Government sponsored enterprise obligations		214,852		474		(1,482	)		213,844		264,234		156		(3,351	)		261,039
Mortgage-backed securities - government agencies		163,571		383		(2,447	)		161,507
Mortgage backed securities - government agencies											149,748		282		(3,753	)		146,277
Obligations of states and political subdivisions		48,987		365		(163	)		49,189		29,760		107		(188	)		29,679

Total securities available for sale	$	577,406	$	1,222	$	(4,104	)	$	574,524	$	443,742	$	545	$	(7,292	)	$	436,995

At June 30, 2019 and December 31, 2018, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

There were no gains or losses on sales or calls of securities ~~classified as held to maturity as of June 30, 2018 or December 31, 2017.~~

~~Bancorp sold no securities during~~for the three or -month and six month periods ending June 30, ~~2018~~ 2019 or ~~2017.~~

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

2018. Securities owned by King, totaling $12.4 million, were sold immediately following the acquisition with no gain or loss realized in the income statement.

A summary of ~~the available-for-sale investment~~ securities available for sale by contractual maturity ~~groupings as of June 30, 2018 is shown below.~~follows:

(In thousands)
Securities available-for-sale

Amortized cost

Fair value

Due within 1 year
$ 221,824 $ 221,798
Due after 1 but within 5 years
95,466 93,884
Due after 5 but within 10 years
9,722 9,434
Due after 10 years
108,697 106,319
Mortgage-backed securities – government agencies
148,068 143,135

Total securities available-for-sale
$ 583,777 $ 574,570

(In thousands)	Amortized cost		Fair value

Due within 1 year	$	132,158	$	132,133
Due after 1 year but within 5 years		56,040		56,033
Due after 5 years but within 10 years		7,157		7,232
Due after 10 years		95,078		96,583
Mortgage backed securities - government agencies		131,447		131,598
Total securities available for sale	$	421,880	$	423,579

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay ~~obligations.~~obligations with or without prepayment penalties. The investment portfolio includes agency ~~mortgage-backed~~mortgage backed securities, which are guaranteed by agencies such as ~~the FHLMC, FNMA,~~Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), and ~~GNMA.~~Government National Mortgage Association (“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.

Bancorp pledges portions of its investment securities portfolio to secure public fund deposits, cash balances of uninsured portions of wealth management and trust accounts, and securities sold under agreements to repurchase. TheSecurities with a carrying value of ~~these~~$336.5 million and $355.1 million were pledged ~~securities was approximately $326.2 million~~ at June 30, ~~2018~~ 2019 and ~~$384.7 million at~~ December 31, ~~2017.~~2018, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits, and uninsured cash balances for WM&T accounts.

Table of Contents

Securities with unrealized losses at June 30, ~~2018~~ 2019 and December 31, ~~2017, not recognized~~2018, aggregated by investment category and length of time securities have been in ~~the statements of income are as~~a continuous unrealized loss position follows:

(In thousands)	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2018	value		losses			value		losses			value		losses
																Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2019																value		losses			value		losses			value		losses

Government sponsored enterprise obligations	$	338,170	$	(3,061	)	$	41,051	$	(1,207	)	$	379,221	$	(4,268	)	$	—	$	—		$	57,505	$	(319	)	$	57,505	$	(319	)
Mortgage-backed securities - government agencies		75,738		(1,952	)		60,124		(3,091	)		135,862		(5,043	)		—		—			82,088		(787	)		82,088		(787	)
Obligations of states and political subdivisions		19,840		(165	)		5,243		(74	)		25,083		(239	)		—		—			6,485		(6	)		6,485		(6	)

Total temporarily impaired securities	$	433,748	$	(5,178	)	$	106,418	$	(4,372	)	$	540,166	$	(9,550	)	$	—	$	—		$	146,078	$	(1,112	)	$	146,078	$	(1,112	)

December 31, 2017
U.S. Treasury and U.S. obligations	$	149,984	$	(12	)	$	-	$	-		$	149,984	$	(12	)
December 31, 2018
Government sponsored enterprise obligations		95,139		(586	)		49,870		(896	)		145,009		(1,482	)		96,740		(38	)		149,320		(3,313	)		246,060		(3,351	)
Mortgage-backed securities - government agencies		69,290		(440	)		67,047		(2,007	)		136,337		(2,447	)		3,108		(5	)		120,848		(3,748	)		123,956		(3,753	)
Obligations of states and political subdivisions		22,366		(107	)		5,064		(56	)		27,430		(163	)		814		(1	)		17,639		(187	)		18,453		(188	)

Total temporarily impaired securities	$	336,779	$	(1,145	)	$	121,981	$	(2,959	)	$	458,760	$	(4,104	)	$	100,662	$	(44	)	$	287,807	$	(7,248	)	$	388,469	$	(7,292	)

Applicable dates for determining when securities are in an unrealized loss position are June 30, ~~2018~~ 2019 and December 31, ~~2017.~~ 2018. 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~~“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 ~~132~~61 and 117 separate investment positions as of June 30, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, respectively. Because management does not intend to sell the ~~investments,~~securities, and it is not likely that Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, Bancorp does not consider these securities to be other-than-temporarily impaired at June 30, ~~2018.~~2019.

~~FHLB~~The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.

Federal Home Loan Bank of Cincinnati (“FHLB”) stock is an investment held by Bancorp which is not readily marketable and is carried at cost adjusted for identified impairment. ~~No impairment was indicated as of June 30, 2018.~~Impairment is evaluated on an annual basis in the fourth quarter. Holdings of ~~Federal Home Loan Bank of Cincinnati (FHLB)~~FHLB stock are required for access to FHLB ~~borrowing.~~advances.

1016

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~~Stock Yards Bancorp, inc. and subsidiary~~

~~(3)~~(4)

Loans and leases

Composition of loans, net of deferred fees and costs, by ~~primary~~ loan portfolio class follows:

(In thousands)

June 30, 2018

December 31, 2017

Commercial and industrial
$ 855,015 $ 779,014
Construction and development, excluding undeveloped land
216,068 195,912
Undeveloped land
22,156 18,988

Real estate mortgage:

Commercial investment
622,777 594,902
Owner occupied commercial
420,999 398,685
1-4 family residential
277,735 262,110
Home equity - first lien
53,257 57,110
Home equity - junior lien
66,323 63,981
Subtotal: Real estate mortgage
1,441,091 1,376,788

Consumer
43,630 38,868

Total loans
$ 2,577,960 $ 2,409,570

~~Table of Contents~~

~~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 June 30, 2018 and December 31, 2017.

(In thousands)

Type of loan

Construction

and development

Commercial

excluding

and

undeveloped

Undeveloped

Real estate

June 30, 2018

industrial

land

land

mortgage

Consumer

Total

Loans
$ 855,015 $ 216,068 $ 22,156 $ 1,441,091 $ 43,630 $ 2,577,960

Loans collectively evaluated for impairment
$ 852,566 $ 215,688 $ 21,682 $ 1,437,155 $ 43,630 $ 2,570,721

Loans individually evaluated for impairment
$ 2,449 $ 380 $ 474 $ 3,936 $ - $ 7,239

Loans acquired with deteriorated credit quality
$ - $ - $ - $ - $ - $ -

Construction

and development

Commercial

excluding

and

undeveloped

Undeveloped

Real estate

industrial

land

land

mortgage

Consumer

Total

Allowance for loan losses

At December 31, 2017
$ 11,276 $ 1,724 $ 521 $ 11,012 $ 352 $ 24,885
Provision (credit)
2,769 214 (20 ) (1,104 ) 111 1,970
Charge-offs
(1,939 ) - - - (236 ) (2,175 )
Recoveries
12 - - 6 175 193
At June 30, 2018
$ 12,118 $ 1,938 $ 501 $ 9,914 $ 402 $ 24,873

Allowance for loans collectively evaluated for impairment
$ 11,769 $ 1,938 $ 501 $ 9,586 $ 402 $ 24,196

Allowance for loans individually evaluated for impairment
$ 349 $ - $ - $ 328 $ - $ 677

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

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~~Stock Yards Bancorp, inc. and subsidiary~~

(In thousands)

Type of loan

Construction

and development

Commercial

excluding

and

undeveloped

Undeveloped

Real estate

December 31, 2017

industrial

land

land

mortgage

Consumer

Total

Loans
$ 779,014 $ 195,912 $ 18,988 $ 1,376,788 $ 38,868 $ 2,409,570

Loans collectively evaluated for impairment
$ 777,838 $ 195,248 $ 18,514 $ 1,371,246 $ 38,868 $ 2,401,714

Loans individually evaluated for impairment
$ 1,176 $ 664 $ 474 $ 5,066 $ - $ 7,380

Loans acquired with deteriorated credit quality
$ - $ - $ - $ 476 $ - $ 476

Construction

and development

Commercial

excluding

and

undeveloped

Undeveloped

Real estate

industrial

land

land

mortgage

Consumer

Total

Allowance for loan losses

At December 31, 2016
$ 10,483 $ 1,923 $ 684 $ 10,573 $ 344 $ 24,007
Provision (credit)
2,373 (199 ) (163 ) 383 156 2,550
Charge-offs
(1,782 ) - - (98 ) (549 ) (2,429 )
Recoveries
202 - - 154 401 757
At December 31, 2017
$ 11,276 $ 1,724 $ 521 $ 11,012 $ 352 $ 24,885

Allowance for loans collectively evaluated for impairment
$ 11,242 $ 1,724 $ 521 $ 10,998 $ 352 $ 24,837

Allowance for loans individually evaluated for impairment
$ 34 $ - $ - $ 14 $ - $ 48

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:~~

(In thousands)	June 30, 2019		December 31, 2018

Commercial and industrial	$	860,085	$	833,524
Construction and development, excluding undeveloped land(1)		222,632		225,050
Undeveloped land		35,169		30,092

Real estate mortgage:
Commercial investment		696,421		588,610
Owner occupied commercial		452,719		426,373
1-4 family residential		338,957		276,017
Home equity - first lien		46,012		49,500
Home equity - junior lien		67,948		70,947
Subtotal: Real estate mortgage		1,602,057		1,411,447

Consumer		43,937		48,058
Total loans(2)	$	2,763,880	$	2,548,171

●

~~Commercial and industrial loans: Loans in this category are made to businesses. Generally these loans are secured by assets~~(1) Consists of the business and repayment is expected from cash flows of the business. A decline in the strength of the business or a weakened economy and resultant decreased consumer and/or business spending may have an effect on 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 loans generally 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. 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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~~Stock Yards Bancorp, inc. and subsidiary~~

	●	~~Undeveloped land: Loans in this category are secured by~~ land acquired for development by the borrower, but for which no development has yet taken ~~place. Credit risk is primarily dependent upon the financial strength~~place.
(2) Total loans are presented inclusive of ~~the borrower, but can also be affected by market conditions~~premiums, discounts, and time to sell lots at an adequate price in the future. Credit risk is also affected by availability of permanent financing, including to the end user, to the extent such permanent financing is not being provided by Bancorp.

●net loan origination fees and costs.

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 owner-occupied 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, and to a lesser extent the borrowers’ financial strength, once the project is stabilized. Underlying properties are generally located in Bancorp's primary market area. Cash flows of income producing investment properties may be adversely impacted by a downturn in the economy as reflected in increased vacancy rates, which in turn, will have an effect on credit quality and property values. 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 as well as home and securities prices, will have a significant effect on credit quality in this loan category.

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

~~The following tables present~~Loans to directors and their related interests, including loans ~~individually evaluated~~to companies for ~~impairment~~which directors are principal owners and executive officers totaled $53.7 million and $52.7 million, as of June 30, ~~2018~~ 2019 and December 31, ~~2017.~~

(In thousands)

Unpaid

Average

Recorded

principal

Related

recorded

June 30, 2018

investment

balance

allowance

investment

Loans with no related allowance recorded:

Commercial and industrial
$ 238 $ 321 $ - $ 531
Construction and development, excluding undeveloped land
380 550 - 571
Undeveloped land
474 506 - 474

Real estate mortgage

Commercial investment
- - - 17
Owner occupied commercial
1,232 1,690 - 2,667
1-4 family residential
1,107 1,128 - 1,446
Home equity - first lien
- - - -
Home equity - junior lien
5 5 - 22
Subtotal: Real estate mortgage
2,344 2,823 - 4,152

Consumer
- - - 30
Subtotal
$ 3,436 $ 4,200 $ - $ 5,758

Loans with an allowance recorded:

Commercial and industrial
$ 2,211 $ 3,389 $ 349 $ 2,061
Construction and development, excluding undeveloped land
- - - -
Undeveloped land
- - - 32

Real estate mortgage

Commercial investment
- - - -
Owner occupied commercial
1,578 1,578 314 1,097
1-4 family residential
14 14 14 14
Home equity - first lien
- - - -
Home equity - junior lien
- - - -
Subtotal: Real estate mortgage
1,592 1,592 328 1,111

Consumer
- - - -
Subtotal
$ 3,803 $ 4,981 $ 677 $ 3,204

Total:

Commercial and industrial
$ 2,449 $ 3,710 $ 349 $ 2,592
Construction and development, excluding undeveloped land
380 550 - 571
Undeveloped land
474 506 - 506

Real estate mortgage

Commercial investment
- - - 17
Owner occupied commercial
2,810 3,268 314 3,764
1-4 family residential
1,121 1,142 14 1,460
Home equity - first lien
- - - -
Home equity - junior lien
5 5 - 22
Subtotal: Real estate mortgage
3,936 4,415 328 5,263

Consumer
- - - 30
Total
$ 7,239 $ 9,181 $ 677 $ 8,962

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~2018, respectively.

(In thousands)

Unpaid

Average

Recorded

principal

Related

recorded

December 31, 2017

investment

balance

allowance

investment

Loans with no related allowance recorded:

Commercial and industrial
$ 1,142 $ 2,202 $ - $ 411
Construction and development, excluding undeveloped land
664 834 - 559
Undeveloped land
474 506 - 425

Real estate mortgage

Commercial investment
52 53 - 110
Owner occupied commercial
3,332 3,789 - 1,678
1-4 family residential
1,637 1,657 - 935
Home equity - first lien
- - - -
Home equity - junior lien
31 31 - 186
Subtotal: Real estate mortgage
5,052 5,530 - 2,909

Consumer
- - - -
Subtotal
$ 7,332 $ 9,072 $ - $ 4,304

Loans with an allowance recorded:

Commercial and industrial
$ 34 $ 34 $ 34 $ 1,882
Construction and development, excluding undeveloped land
- - - -
Undeveloped land
- - - 48

Real estate mortgage

Commercial investment
- - - -
Owner occupied commercial
- - - -
1-4 family residential
14 14 14 5
Home equity - first lien
- - - -
Home equity - junior lien
- - - -
Subtotal: Real estate mortgage
14 14 14 5

Consumer
- - - 46
Subtotal
$ 48 $ 48 $ 48 $ 1,981

Total:

Commercial and industrial
$ 1,176 $ 2,236 $ 34 $ 2,293
Construction and development, excluding undeveloped land
664 834 - 559
Undeveloped land
474 506 - 473

Real estate mortgage
- - - -
Commercial investment
52 53 - 110
Owner occupied commercial
3,332 3,789 - 1,678
1-4 family residential
1,651 1,671 14 940
Home equity - first lien
- - - -
Home equity - junior lien
31 31 - 186
Subtotal: Real estate mortgage
5,066 5,544 14 2,914

Consumer
- - - 46
Total
$ 7,380 $ 9,120 $ 48 $ 6,285

~~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 certain loans.~~

Impaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (TDRs), 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 had $134 thousand past due more than 90 days and still accruing interest at June 30, 2018, compared with $2 thousand at December 31, 2017, and $231 thousand at June 30, 2017.

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~~Stock Yards Bancorp, inc. and subsidiary~~

~~The following table presents the recorded investment in non-accrual loans as of June 30, 2018 and December 31, 2017.~~

(In thousands)

June 30, 2018

December 31, 2017

Commercial and industrial
$ 1,646 $ 321
Construction and development, excluding undeveloped land
380 664
Undeveloped land
474 474

Real estate mortgage

Commercial investment
- 52
Owner occupied commercial
2,809 3,332
1-4 family residential
1,108 1,637
Home equity - first lien
- -
Home equity - junior lien
5 31
Subtotal: Real estate mortgage
3,922 5,052

Consumer
- -

Total
$ 6,422 $ 6,511

In the course of working with borrowers, Bancorp may elect to restructure the contractual terms of certain loans. Troubled debt restructurings (TDRs) occur when, for economic, legal, or other reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider.

At June 30, 2018 and December 31, 2017, Bancorp had $817 thousand and $869 thousand of accruing loans classified as TDRs, respectively. Bancorp did not modify and classify any additional loans as TDRs during the three-month or six-month periods ended June 30, 2018. No loans were modified and classified as TDRs during the three-month period ended June 30, 2017. One commercial loan, with a recorded investment of $37,000 at June 30, 2017 was modified and classified as a TDR in the six-month period ended June 30, 2017. The pre and post-modification balance for this loan was $39,000. The monthly payment amount of this loan was modified to enable the borrower to fulfill the loan agreement. A specific reserve was established for the entire recorded investment of this loan.

No loans classified and reported as troubled debt restructured within the twelve months prior to June 30, 2018 defaulted during the three or six month periods ended June 30, 2018. Loans accounted for as TDRs 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 TDRs are individually evaluated for impairment and, at June 30, 2018, had a total allowance allocation of $83 thousand, compared with $48 thousand at December 31, 2017.

~~At June 30, 2018 and December 31, 2017, Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDRs.~~

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~~Stock Yards Bancorp, inc. and subsidiary~~

At June 30, 2018 formal foreclosure proceedings were in process on five consumer mortgage loans with a total recorded investment of $551 thousand, all secured by residential real estate properties. The recorded investments for these properties ranged from $30 thousand to $350 thousand, and these loans were reported as non-accrual as of June 30, 2018. As of December 31, 2017, formal foreclosure proceedings were in process for two loans with a total recorded investment of $62 thousand.

The following table ~~presents~~summarizes loans acquired in the ~~aging of~~King acquisition based upon valuation method:

	May 1, 2019
	Contractual		Non-accretable			Accretable			Acquisition-day
(In thousands)	receivable		amount			amount			fair value

Commercial and industrial	$	8,249	$	—		$	(23	)	$	8,226
Construction and development		10,764		—			43			10,807
Raw Land		7,974		—			43			8,017
Real estate mortgage:
Commercial real estate		84,219		—			(408	)		83,811
1-4 family residential		50,556		—			322			50,878
Home equity - first lien		196		—			3			199
Home equity - junior lien		679		—			5			684
Subtotal: Real estate mortgage		135,650		—			(78	)		135,572

Consumer		1,528		—			(3	)		1,525

Total loans ASC 310-20		164,165		—			(18	)		164,147

Commercial and industrial
Construction and development		—		—			—			—
Raw Land		—		—			—			—
Real estate mortgage:
Commercial real estate		1,351		(1,351	)		—			—
1-4 family residential		228		(228	)		—			—
Home equity - first lien		—		—			—			—
Home equity - junior lien		—		—			—			—
Subtotal: Real estate mortgage		1,579		(1,579	)		—			—

Consumer		—		—			—			—

Total loans ASC 310 purchased- credit-impaired loans		1,579		(1,579	)		—			—

Total loans	$	165,744	$	(1,579	)	$	(18	)	$	164,147

Purchased-Credit-Impaired (“PCI”) Loans

The Bank acquired PCI loans on May 1, 2019 in its King acquisition and during the ~~recorded investment in loans as of June 30, 2018 and~~ year ended December 31, ~~2017.~~2012 in the TBOC acquisition. PCI loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

Management utilized the following PCI criteria for the May 1, 2019 King acquisition:

● Loans assigned a non-accretable mark

● Loans classified as substandard, doubtful or loss

● Loans classified as non-accrual when acquired

● Loans past due 90 days or more when acquired

Recorded

(In thousands)

90 or more

investment

days past

> 90 days

30-59 days

60-89 days

due (includes)

Total

Total

and

June 30, 2018

Current

past due

past due

non-accrual)

past due

loans

accruing

Commercial and industrial
$ 852,845 $ 524 $ - $ 1,646 $ 2,170 $ 855,015 $ -
Construction and development, excluding undeveloped land
215,688 - - 380 380 216,068 -
Undeveloped land
21,682 - - 474 474 22,156 -

Real estate mortgage

Commercial investment
619,370 3,407 - - 3,407 622,777 -
Owner occupied commercial
417,474 716 - 2,809 3,525 420,999 -
1-4 family residential
274,980 954 559 1,242 2,755 277,735 134
Home equity - first lien
53,015 242 - - 242 53,257 -
Home equity - junior lien
65,978 241 99 5 345 66,323 -
Subtotal: Real estate mortgage
1,430,817 5,560 658 4,056 10,274 1,441,091 134

Consumer
43,626 1 3 - 4 43,630 -

Total
$ 2,564,658 $ 6,085 $ 661 $ 6,556 $ 13,302 $ 2,577,960 $ 134

December 31, 2017

Commercial and industrial
$ 776,118 $ 2,571 $ 4 $ 321 $ 2,896 $ 779,014 $ -
Construction and development, excluding undeveloped land
194,936 - 312 664 976 195,912 -
Undeveloped land
18,514 - - 474 474 18,988 -

Real estate mortgage

Commercial investment
594,242 608 - 52 660 594,902 -
Owner occupied commercial
394,623 455 275 3,332 4,062 398,685 -
1-4 family residential
259,994 172 307 1,637 2,116 262,110 -
Home equity - first lien
56,938 172 - - 172 57,110 -
Home equity - junior lien
63,667 87 194 33 314 63,981 2
Subtotal: Real estate mortgage
1,369,464 1,494 776 5,054 7,324 1,376,788 2

Consumer
38,699 86 83 - 169 38,868 -

Total
$ 2,397,731 $ 4,151 $ 1,175 $ 6,513 $ 11,839 $ 2,409,570 $ 2

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~~Stock Yards Bancorp, inc.~~

The following table reconciles the contractually required and ~~subsidiary~~carrying amounts of all PCI loans:

In thousands	June 30, 2019			December 31, 2018

Contractually-required principal	$	1,864		$	432
Non-accretable amount		(1,577	)		—
Accretable amount		(57	)		(68	)
Carrying value of loans	$	230		$	364

The following table presents a rollforward of the accretable amount on all PCI loans:

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2019			2018			2019			2018

Balance, beginning of period	$	(62	)	$	(95	)	$	(68	)	$	(106	)
Transfers between non-accretable and accretable		—			—			—			—
Net accretion into interest income on loans, including loan fees		5			10			11			21
Generated from acquisition of King		—			—			—			—
Balance, end of period	$	(57	)	$	(85	)	$	(57	)	$	(85	)

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 ultimate 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. ~~While on non-accrual status, payments of interest are applied to reduce the recorded investment in the loan.~~

●

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as ~~doubtful have all~~substandard, with the added characteristic that 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 June 30, 2018 and December 31, 2017, the internally~~Internally assigned risk grades of loans by loan portfolio class classification category ~~were as~~ follows:

(In thousands)							Substandard				Total								Substandard				Total
June 30, 2018	Pass		OAEM		Substandard		non-performing		Doubtful		loans
June 30, 2019													Pass		OAEM		Substandard		non-performing		Doubtful		loans

Commercial and industrial	$	818,660	$	21,166	$	12,740	$	2,449	$	-	$	855,015	$	817,645	$	23,907	$	18,241	$	292	$	—	$	860,085
Construction and development, excluding undeveloped land		215,688		-		-		380		-		216,068		222,632		—		—		—		—		222,632
Undeveloped land		21,652		-		30		474		-		22,156		35,169		—		—		—		—		35,169

Real estate mortgage
Real estate mortgage:
Commercial investment		619,939		2,715		123		-		-		622,777		687,304		4,202		4,213		702		—		696,421
Owner occupied commercial		403,998		12,453		1,738		2,810		-		420,999		429,070		17,757		4,228		1,664		—		452,719
1-4 family residential		273,792		1,858		830		1,255		-		277,735		336,312		1,686		159		800		—		338,957
Home equity - first lien		53,257		-		-		-		-		53,257		46,012		—		—		—		—		46,012
Home equity - junior lien		65,843		100		375		5		-		66,323		67,236		224		18		470		—		67,948
Subtotal: Real estate mortgage		1,416,829		17,126		3,066		4,070		-		1,441,091		1,565,934		23,869		8,618		3,636		—		1,602,057

Consumer		43,523		107		-		-		-		43,630		43,937		—		—		—		—		43,937

Total	$	2,516,352	$	38,399	$	15,836	$	7,373	$	-	$	2,577,960	$	2,685,317	$	47,776	$	26,859	$	3,928	$	—	$	2,763,880


December 31, 2017
December 31, 2018

Commercial and industrial	$	751,628	$	12,032	$	14,178	$	1,176	$	-	$	779,014	$	803,073	$	11,516	$	18,703	$	232	$	—	$	833,524
Construction and development, excluding undeveloped land		195,248		-		-		664		-		195,912		220,532		4,200		—		318		—		225,050
Undeveloped land		18,484		-		30		474		-		18,988		29,618		—		—		474		—		30,092

Real estate mortgage
Real estate mortgage:
Commercial investment		591,232		3,599		19		52		-		594,902		586,543		1,815		15		237		—		588,610
Owner occupied commercial		383,455		8,683		3,215		3,332		-		398,685		411,722		9,030		4,500		1,121		—		426,373
1-4 family residential		256,968		2,477		1,014		1,651		-		262,110		273,537		1,544		162		774		—		276,017
Home equity - first lien		57,110		-		-		-		-		57,110		49,500		—		—		—		—		49,500
Home equity - junior lien		63,471		247		230		33		-		63,981		70,437		249		19		242		—		70,947
Subtotal: Real estate mortgage		1,352,236		15,006		4,478		5,068		-		1,376,788		1,391,739		12,638		4,696		2,374		—		1,411,447

Consumer		38,747		117		4		-		-		38,868		48,058		—		—		—		—		48,058

Total	$	2,356,343	$	27,155	$	18,690	$	7,382	$	-	$	2,409,570	$	2,493,020	$	28,354	$	23,399	$	3,398	$	—	$	2,548,171

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~~Stock Yards Bancorp, inc. and subsidiary~~

The following table presents the activity in the allowance by loan portfolio class:

	Type of loan
			Construction
			and development,
Three months ended	Commercial		excluding
	and		undeveloped			Undeveloped			Real estate
(In thousands)	industrial		land			land			mortgage			Consumer			Total

Balance, April 1, 2019	$	11,762	$	1,884		$	662		$	12,001		$	155		$	26,464
Provision (credit)		92		(74	)		(61	)		10			33			-
Charge-offs		—		—			—			(13	)		(148	)		(161	)
Recoveries		4		—			—			32			77			113
Balance, June 30, 2019	$	11,858	$	1,810		$	601		$	12,030		$	117		$	26,416

				Construction
				and development,
	Commercial			excluding
	and			undeveloped			Undeveloped		Real estate
(In thousands)	industrial			land			land		mortgage			Consumer			Total

Balance, April 1, 2018	$	10,638		$	2,020		$	482	$	10,707		$	356		$	24,203
Provision (credit)		2,008			(82	)		19		(795	)		85			1,235
Charge-offs		(530	)		—			—		—			(117	)		(647	)
Recoveries		2			—			—		2			78			82
Balance, June 30, 2018	$	12,118		$	1,938		$	501	$	9,914		$	402		$	24,873

	Type of loan
				Construction
				and development,
Six months ended	Commercial			excluding
	and			undeveloped			Undeveloped			Real estate
(In thousands)	industrial			land			land			mortgage			Consumer			Total

Balance, January 1, 2019	$	11,965		$	1,760		$	752		$	10,681		$	376		$	25,534
Provision (credit)		(210	)		(153	)		(151	)		1,310			(196	)		600
Charge-offs		(3	)		—			—			(13	)		(244	)		(260	)
Recoveries		106			203			—			52			181			542
Balance, June 30, 2019	$	11,858		$	1,810		$	601		$	12,030		$	117		$	26,416

				Construction
				and development,
	Commercial			excluding
	and			undeveloped		Undeveloped			Real estate
(In thousands)	industrial			land		land			mortgage			Consumer			Total

Balance, January 1, 2018	$	11,276		$	1,724	$	521		$	11,012		$	352		$	24,885
Provision (credit)		2,769			214		(20	)		(1,104	)		111			1,970
Charge-offs		(1,939	)		—		—			—			(236	)		(2,175	)
Recoveries		12			—		—			6			175			193
Balance, June 30, 2018	$	12,118		$	1,938	$	501		$	9,914		$	402		$	24,873

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The considerations by Bancorp in computing its allowance are determined based on the various risk characteristics of each loan segment. Relevant risk characteristics are as follows:

~~(4)~~●

~~Goodwill~~Commercial and ~~Intangible Assets~~industrial: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from cash flows of the business. A decline in the strength of the business or a weakened economy and resultant decreased consumer and/or business spending may have an effect on 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 the construction period. Upon completion or stabilization, the construction loans generally 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. 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.

●

Undeveloped land: Loans in this category are secured by land acquired for development by the borrower, but for which no development has yet taken place. Credit risk is primarily dependent upon the financial strength of the borrower, but can also be affected by market conditions and time to sell lots at an adequate price in the future. Credit risk is also affected by availability of permanent financing, including to the end user, 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. Underlying properties are generally located in Bancorp's primary market areas. A decline in the strength of the borrower or a weakened economy may have an effect on the credit quality of this type of loan. For owner occupied residential and owner-occupied 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, and to a lesser extent the borrowers’ financial strength, once the project is stabilized. Cash flows of income producing investment properties may be adversely impacted by a downturn in the economy as reflected by increased vacancy rates, which in turn, will have an effect on credit quality and property values. 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, as well as home and securities prices, will have a significant effect on credit quality in this loan category.

USImpaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (“TDRs”), 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.

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The following table presents the recorded investment in non-accrual loans:

(In thousands)	June 30, 2019		December 31, 2018

Commercial and industrial	$	96	$	192
Construction and development, excluding undeveloped land		—		318
Undeveloped land		—		474

Real estate mortgage:
Commercial investment		305		138
Owner occupied commercial		1,444		586
1-4 family residential		715		760
Home equity - first lien		—		—
Home equity - junior lien		470		143
Subtotal: Real estate mortgage		2,934		1,627
Consumer		—		—
Total non-accrual loans	$	3,030	$	2,611

In the course of working with borrowers, Bancorp may elect to restructure the contractual terms of certain loans. TDRs occur when, for economic, legal, or other reasons related to a borrower’s financial difficulties, Bancorp grants a concession to the borrower that it would not otherwise consider. Bancorp did not recognize new TDRs, nor did any TDRs default, in the three and six months periods ended June 30, 2019 and 2018. Detail of outstanding TDRs follows:

	June 30, 2019						December 31, 2018
(In thousands)			Specific		Additional				Specific		Additional
			reserve		commitment				reserve		commitment
TDRs	Balance		allocation		to lend		Balance		allocation		to lend

Commercial and industrial	$	23	$	23	$	—	$	28	$	28	$	—
1-4 family residential		14		14		—		14		14		—

Total TDRs	$	37	$	37	$	—	$	42	$	42	$	—

As of June 30, 2019 formal foreclosure proceedings were in process on 1-4 family residential mortgage loans with a total recorded investment of $795 thousand, as compared with $528 thousand as of December 31, 2018.

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The following tables present the balance in the recorded investment in loans and allowance for loans by portfolio loan class and based on impairment evaluation method:

(In thousands)	Loans								Allowance

June 30, 2019	Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Loans acquired with deteriorated credit quality		Total loans		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Loans acquired with deteriorated credit quality		Total allowance

Commercial and industrial	$	119	$	859,966	$	—	$	860,085	$	23	$	11,835	$	—	$	11,858
Construction and development, excluding undeveloped land		—		222,632		—		222,632		—		1,810		—		1,810
Undeveloped land		—		35,169		—		35,169		—		601		—		601
Real estate mortgage		2,948		1,599,109		—		1,602,057		14		12,016		—		12,030
Consumer		—		43,937		—		43,937		—		117		—		117

Total	$	3,067	$	2,760,813	$	—	$	2,763,880	$	37	$	26,379	$	—	$	26,416

(In thousands)	Loans								Allowance

December 31, 2018	Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Loans acquired with deteriorated credit quality		Total loans		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Loans acquired with deteriorated credit quality		Total allowance

Commercial and industrial	$	220	$	833,304	$	—	$	833,524	$	28	$	11,937	$	—	$	11,965
Construction and development, excluding undeveloped land		318		224,732		—		225,050		—		1,760		—		1,760
Undeveloped land		474		29,618		—		30,092		—		752		—		752
Real estate mortgage		1,641		1,409,806		—		1,411,447		14		10,667		—		10,681
Consumer		—		48,058		—		48,058		—		376		—		376

Total	$	2,653	$	2,545,518	$	—	$	2,548,171	$	42	$	25,492	$	—	$	25,534

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The following tables present loans individually evaluated for impairment by loan portfolio class:

	As of						Three months ended				Six months ended
	June 30, 2019						June 30, 2019				June 30, 2019

			Unpaid				Average		Interest		Average		Interest
	Recorded		principal		Related		recorded		income		recorded		income
(In thousands)	investment		balance		allowance		investment		recognized		investment		recognized

Impaired loans with no related allowance:
Commercial and industrial	$	96	$	96	$	—	$	144	$	—	$	160	$	—
Construction and development, excluding undeveloped land		—		—		—		—		—		106		—
Undeveloped land		—		—		—		—		—		158		—

Real estate mortgage
Commercial investment		306		306		—		311		—		254		—
Owner occupied commercial		1,444		1,882		—		1,455		—		1,165		—
1-4 family residential		715		715		—		779		—		773		—
Home equity - first lien		—		-		—		—		—		—		—
Home equity - junior lien		469		469		—		462		—		356		—
Subtotal: Real estate mortgage		2,934		3,372		—		3,007		—		2,548		—

Consumer		—		—		—		—		—		—		—
Subtotal	$	3,030	$	3,468	$	—	$	3,151	$	—	$	2,972	$	—

Impaired loans with an allowance:
Commercial and industrial	$	23	$	23	$	23	$	24	$	—	$	26	$	1
Construction and development, excluding undeveloped land		—		—		—		—		—		—		—
Undeveloped land		—		—		—		—		—		—		—

Real estate mortgage
Commercial investment		—		—		—		—		—		—		—
Owner occupied commercial		—		—		—		—		—		—		—
1-4 family residential		14		14		14		14		—		14		—
Home equity - first lien		—		—		—		—		—		—		—
Home equity - junior lien		—		—		—		—		—		—		—
Subtotal: Real estate mortgage		14		14		14		14		—		14		—

Consumer		—		—		—		—		—		—		—
Subtotal	$	37	$	37	$	37	$	38	$	—	$	40	$	1

Total:
Commercial and industrial	$	119	$	119	$	23	$	168	$	—	$	186	$	1
Construction and development, excluding undeveloped land		—		—		—		—		—		106		—
Undeveloped land		—		—		—		—		—		158		—

Real estate mortgage
Commercial investment		306		306		—		311		—		254		—
Owner occupied commercial		1,444		1,882		—		1,455		—		1,165		—
1-4 family residential		729		729		14		793		—		787		—
Home equity - first lien		—		—		—		-		—		-		—
Home equity - junior lien		469		469		—		462		—		356		—
Subtotal: Real estate mortgage		2,948		3,386		14		3,021		—		2,562		—

Consumer		—		—		—		—		—		—		—
Total impaired loans	$	3,067	$	3,505	$	37	$	3,189	$	—	$	3,012	$	1

Table of Contents

	As of						Three months ended				Six months ended
	December 31, 2018						June 30, 2018				June 30, 2018

			Unpaid				Average		Interest		Average		Interest
	Recorded		principal		Related		recorded		income		recorded		income
(In thousands)	investment		balance		allowance		investment		recognized		investment		recognized

Impaired loans with no related allowance:
Commercial and industrial	$	192	$	707	$	—	$	225	$	—	$	531	$	—
Construction and development, excluding undeveloped land		318		489		—		525		—		571		—
Undeveloped land		474		506		—		474		—		474		—

Real estate mortgage
Commercial investment		138		138		—		-		—		17		—
Owner occupied commercial		586		1,023		—		2,335		—		2,667		—
1-4 family residential		760		760		—		1,350		—		1,446		—
Home equity - first lien		—		-		—		-		—		-		—
Home equity - junior lien		143		143		—		17		—		22		—
Subtotal: Real estate mortgage		1,627		2,064		—		3,702		—		4,152		—

Consumer		—		—		—		46		—		30		—
Subtotal	$	2,611	$	3,766	$	—	$	4,972	$	—	$	5,758	$	—

Impaired loans with an allowance:
Commercial and industrial	$	28	$	28	$	28	$	3,074	$	—	$	2,061	$	—
Construction and development, excluding undeveloped land		—		—		—		—		—		—		—
Undeveloped land		—		—		—		48		—		32		—

Real estate mortgage
Commercial investment		—		—		—		—		—		—		—
Owner occupied commercial		—		—		—		1,645		—		1,097		—
1-4 family residential		14		14		14		14		—		14		—
Home equity - first lien		—		—		—		—		—		—		—
Home equity - junior lien		—		—		—		—		—		—		—
Subtotal: Real estate mortgage		14		14		14		1,659		—		1,111		—

Consumer		—		—		—		—		—		—		—
Subtotal	$	42	$	42	$	42	$	4,781	$	—	$	3,204	$	—

Total:
Commercial and industrial	$	220	$	735	$	28	$	3,299	$	—	$	2,592	$	—
Construction and development, excluding undeveloped land		318		489		—		525		—		571		—
Undeveloped land		474		506		—		522		—		506		—

Real estate mortgage
Commercial investment		138		138		—		-		—		17		—
Owner occupied commercial		586		1,023		—		3,980		—		3,764		—
1-4 family residential		774		774		14		1,364		—		1,460		—
Home equity - first lien		—		—		—		-		—		-		—
Home equity - junior lien		143		143		—		17		—		22		—
Subtotal: Real estate mortgage		1,641		2,078		14		5,361		—		5,263		—

Consumer		—		—		—		46		—		30		—
Total impaired loans	$	2,653	$	3,808	$	42	$	9,753	$	—	$	8,962	$	—

Differences between recorded investment amounts and unpaid principal balance amounts less related allowance are due to partial charge-offs which have occurred over the lives of certain loans.

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The following table presents the aging of the recorded investment in loans by portfolio class:

													Recorded
(In thousands)							90 or more						investment
							days past due						> 90 days
			30-59 days		60-89 days		(includes all		Total		Total		and
June 30, 2019	Current		past due		past due		non-accrual)		past due		loans		accruing

Commercial and industrial	$	858,853	$	572	$	391	$	269	$	1,232	$	860,085	$	173
Construction and development, excluding undeveloped land		222,632		—		—		—		—		222,632		—
Undeveloped land		35,169		—		—		—		—		35,169		—

Real estate mortgage:
Commercial investment		692,612		1		3,107		701		3,809		696,421		396
Owner occupied commercial		450,140		643		272		1,664		2,579		452,719		220
1-4 family residential		336,548		749		873		787		2,409		338,957		72
Home equity - first lien		45,963		49		—		—		49		46,012		—
Home equity - junior lien		67,408		70		—		470		540		67,948		—
Subtotal: Real estate mortgage		1,592,671		1,512		4,252		3,622		9,386		1,602,057		688

Consumer		43,901		9		27		—		36		43,937		—

Total	$	2,753,226	$	2,093	$	4,670	$	3,891	$	10,654	$	2,763,880	$	861

December 31, 2018

Commercial and industrial	$	832,923	$	197	$	200	$	204	$	601	$	833,524	$	12
Construction and development, excluding undeveloped land		224,732		—		—		318		318		225,050		—
Undeveloped land		29,552		66		—		474		540		30,092		—

Real estate mortgage:
Commercial investment		586,884		1,382		107		237		1,726		588,610		99
Owner occupied commercial		421,143		2,732		1,377		1,121		5,230		426,373		535
1-4 family residential		274,547		374		336		760		1,470		276,017		—
Home equity - first lien		49,321		179		—		—		179		49,500		—
Home equity - junior lien		70,467		182		56		242		480		70,947		99
Subtotal: Real estate mortgage		1,402,362		4,849		1,876		2,360		9,085		1,411,447		733

Consumer		48,058		—		—		—		—		48,058		—

Total	$	2,537,627	$	5,112	$	2,076	$	3,356	$	10,544	$	2,548,171	$	745

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(5)

Goodwill and Intangible Assets

Goodwill, recorded on the acquisition date of an entity, represents $12.1 million related to the May 1, 2019 King acquisition and $682 thousand related to the 1996 purchase of a bank in southern Indiana. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. During this measurement period, Bancorp may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.

The goodwill balance at June 30, 2019 relates entirely to the Commercial Banking segment of Bancorp. GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Bancorp’s annual goodwill impairment test is conducted as of December 31 of each year or more often as situations dictate. At December 31, 2018, Bancorp’s Commercial Banking reporting unit had positive equity and Bancorp ~~currently has goodwill in the amount of $682 thousand from the 1996 acquisition of an Indiana bank. No impairment charges have been deemed necessary or recorded~~elected to ~~date, as~~perform a qualitative assessment to determine if it was more-likely-than-not that the fair value ~~is substantially in excess~~ of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair value. ~~This goodwill is assigned to~~Therefore, Bancorp did not complete the ~~commercial banking segment~~two-step impairment test as of ~~Bancorp.~~December 31, 2018.

~~Bancorp~~Changes in the carrying value of goodwill follows:

	Three months ended				Six months ended
	June 30,				June 30,
(In thousands)	2019		2018		2019		2018
Balance at beginning of period	$	682	$	682	$	682	$	682
Goodwill acquired		12,144		—		12,144		—
Impairment		—		—		—		—
Balance at end of period	$	12,826	$	682	$	12,826	$	682

The Company recorded ~~a gross~~ core deposit intangible ~~totaling~~assets of $1.5 million and $2.5 million ~~as a result~~in association with its May 1, 2019 King and 2013 TBOC acquisitions, respectively.

Details regarding the King acquisition are discussed in the Acquisitions footnote. Changes in the net carrying amount of its 2013 acquisition of THE BANCorp, Inc. This intangible is being amortized over the expected life of the underlying deposits to which the intangible is attributable. At June 30, 2018, the unamortized core deposit ~~intangible was $1.1 million.~~intangibles follow:

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2019			2018			2019			2018
Balance at beginning of period	$	1,015		$	1,182		$	1,056		$	1,225
Core deposit intangible acquired		1,519			—			1,519			—
Amortization		(73	)		(43	)		(114	)		(86	)

Balance at end of period	$	2,461		$	1,139		$	2,461		$	1,139

Mortgage servicing rights ~~(MSRs)~~(“MSRs”), a component of other assets, 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 June 30, ~~2018~~ 2019 and December 31, ~~2017~~ 2018 were ~~$3.5~~$2.9 million and ~~$3.1~~$3.6 million, respectively.

Total outstanding principal balances of loans serviced for others were ~~$331.5~~$325.1 million and ~~$344.5~~$327.9 million at June 30, ~~2018,~~ 2019, and December 31, ~~2017,~~ 2018, respectively.

Table of Contents

Changes in the net carrying amount of MSRs follows:

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2019			2018			2019			2018
Balance at beginning of period	$	1,070		$	861		$	1,022		$	875
Additions for mortgage loans sold		134			74			214			95
Amortization		(36	)		(37	)		(68	)		(72	)

Balance at end of period	$	1,168		$	898		$	1,168		$	898

(6)

Income Taxes

In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Historically, the franchise tax, a component of non-interest expenses, was assessed at 1.1% of net capital and averaged $2.5 million annually over the prior two year-end periods. The Kentucky corporate income tax will be assessed at 5% of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, during the first quarter of 2019, Bancorp established a Kentucky state deferred tax asset related to existing temporary differences estimated to reverse after the effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of federal impact of $1.3 million, or approximately $0.06 per diluted share for the ~~three~~first quarter 2019. While this is positive in the short-term, Bancorp anticipates an unfavorable impact of approximately $200 thousand per year beginning in 2021.

In April 2019, the Kentucky legislature passed HB458 allowing banks and their holding companies to be combined together for Kentucky tax return filings. The combined filing will allow Bancorp’s holding company net operating losses to offset against net revenue generated by The Bank and reduce Bancorp’s tax liability. Bancorp recorded s state tax benefit associated with this change of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the three and six ~~months~~ month periods ended June 30, ~~2018 and 2017 are shown in the following table:~~2019.

For the three months

For the six months

ended June 30,

ended June 30,

(In thousands)

2018

2017

2018

2017

Balance at beginning of period
$ 861 $ 891 $ 875 $ 921
Additions for mortgage loans sold
74 51 95 93
Amortization
(37 ) (73 ) (72 ) (145 )
Balance at end of period
$ 898 $ 869 $ 898 $ 869

Components of income tax expense (benefit) from operations follow:

	Three months ended						Six months ended
	June 30,						June 30,
(In thousands)	2019			2018			2019			2018
Current income tax expense:
Federal	$	3,772		$	3,426		$	6,498		$	5,862
State		189			182			330			310
Total current income tax expense		3,961			3,608			6,828			6,172

Deferred income tax expense (benefit) :
Federal		224			(421	)		789			46
State		(3,155	)		(28	)		(4,768	)		(7	)
Total deferred income tax expense		(2,931	)		(449	)		(3,979	)		39
Change in valuation allowance		—			—			20			—
Total income tax expense	$	1,030		$	3,159		$	2,869		$	6,211

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~~Stock Yards Bancorp, inc. and subsidiary~~

~~(5)~~

~~Income Taxes~~

~~Components of income tax expense from operations were as follows:~~

Three months ended

Six months ended

June 30,

June 30,

(In thousands)

2018

2017

2018

2017

Current income tax expense

Federal
$ 3,426 $ 4,722 $ 5,862 $ 7,725
State
182 179 310 293
Total current income tax expense
3,608 4,901 6,172 8,018

Deferred income tax (benefit) expense

Federal
(421 ) (631 ) 46 (657 )
State
(28 ) (24 ) (7 ) 14
Total deferred income tax expense
(449 ) (655 ) 39 (643 )
Change in valuation allowance
- 113 - 126
Total income tax expense
$ 3,159 $ 4,359 $ 6,211 $ 7,501

An analysis of the difference between statutory and effective income tax rates ~~for the three and six months ended June 30, 2018 and 2017~~ follows:

													Three months ended							Six months ended
	Three months ended June 30,						Six months ended June 30,						June 30,							June 30,
	2018			2017			2018			2017			2019				2018			2019			2018
U.S. federal statutory income tax rate		21.0	%		35.0	%		21.0	%		35.0	%		21.0	%			21.0	%		21.0	%		21.0	%
Excess tax benefits from share-based compensation arrangements		(1.2	)		(0.7	)		(1.5	)		(3.8	)
Kentucky state income tax enactments														(14.1	)			—			(10.7	)		—
Excess tax benefits from stock-based compensation arrangements														(0.4	)			(1.2	)		(1.1	)		(1.5	)
Increase in cash surrender value of life insurance														(0.6	)	��		(1.2	)		(0.9	)		(0.6	)
Tax credits		(0.7	)		(5.1	)		(0.5	)		(5.3	)		(0.7	)			(0.7	)		(0.7	)		(0.5	)
Tax exempt interest income		(0.5	)		(1.1	)		(0.5	)		(1.1	)		(0.3	)			(0.5	)		(0.3	)		(0.5	)
Increase in cash surrender value of life insurance		(1.2	)		(1.9	)		(0.6	)		(1.6	)
State income taxes, net of federal benefit		0.7			0.7			0.7			0.7			0.8				0.7			0.8			0.7
Other, net		0.8			2.2			0.1			2.1			0.2				0.8			0.1			0.1
Effective income tax rate		18.9	%		29.1	%		18.7	%		26.0	%		5.9	%			18.9	%		8.2	%		18.7	%

~~State~~Currently, state income tax expense represents tax owed into the state of Indiana. Kentucky and Ohio state bank taxes are currently based on capital levels, and are recorded as other non-interest expense. See comment above regarding recent changes in Kentucky tax law.

In December 2017 the Tax Cuts and Jobs Act was enacted and, among other matters, it reduced Bancorp’s marginal federal income tax rate from 35% to 21%. Largely offsetting that decrease, the effective tax rate for the three and six month periods ending June 30, 2018 as compared with the year earlier periods were affected by substantially lower benefit from excess tax benefits from share-based compensation arrangements and from tax credits.

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

In December 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of tax reform in situations where a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allows a measurement period not to extend beyond one year from the tax reform’s enactment date to complete the necessary accounting.

In two areas, Bancorp recorded provisional amounts of deferred taxes as of December 31, 2017, where the information was not available to complete the accounting: 1) the Company’s deferred tax assets of $565 thousand for temporary differences in certain tax credit investments is awaiting receipt of Schedules K-1 from outside preparers. Management believe the Company used a reasonable estimate to account for this item; however, there may be provisions of the new tax law that could impact the partnerships’ calculation of taxable income, which in effect could affect the Company’s share of taxable income. The final effect will not be known until receipt of Schedules K-1. 2) Bancorp estimated that no reductions are required to deferred tax assets included in the $19 thousand of future deductions for compensation that might be subject to new limitations under Code Sec. 162(m) which, generally, limits to $1 million annual deductions for certain compensation paid to certain executives. There is uncertainty in applying new rules to existing contracts, and Bancorp is seeking clarification before finalizing its analysis. In a third area, the Company recorded no provisional amounts to its deferred tax liability for temporary differences between the tax and financial reporting bases of certain property and equipment items. These cannot be reasonably estimated. Bancorp’s deferred tax liability of $541 thousand for temporary differences between the tax and financial reporting bases of fixed assets is awaiting completion of a cost segregation study to take advantage of additional depreciation deductions available through tax reform. Bancorp will complete and record income tax effects of tax reform during the period the necessary information becomes available. This measurement period will not extend beyond December 22, 2018.

US GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. 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. As of June 30, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, the gross amount of unrecognized tax benefits was immaterial to the consolidated financial statements of the Company. Federal and state income tax returns are subject to examination for the years after ~~2013.~~2015.

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

~~(6)~~(7)

Deposits

The composition of the Bank’s deposits ~~outstanding at June 30, 2018 (unaudited) and December 31, 2017 is as~~ follows:

	June 30,		December 31,
(In thousands)	2018		2017		June 30, 2019		December 31, 2018

Non-interest bearing demand	$	715,974	$	674,697
Non-interest bearing demand deposits					$	777,652	$	711,023

Interest bearing deposits:
Interest bearing demand		781,460		833,450		824,324		892,867
Savings		158,756		152,348		171,471		155,007
Money market		633,065		682,226		675,221		688,744

Time deposits of more than $250,000		38,888		38,439
Other time deposits		212,318		197,135
Time deposits of $250 thousand or more						71,952		55,182
Other time deposits(1)						362,833		291,533
Total time deposits		251,206		235,574		434,785		346,715

Total interest bearing deposits		1,824,487		1,903,598		2,105,801		2,083,333

Total deposits	$	2,540,461	$	2,578,295	$	2,883,453	$	2,794,356

(1)

Includes $29.8 million in brokered deposits as of both June 30, 2019 and December 31, 2018.

Deposits totaling $125.5 million were acquired on May 1, 2019, associated with the King acquisition.

~~Maturities of time deposits of more than $250,000, outstanding at June 30, 2018, are summarized as follows:~~

(In thousands)

Amount

3 months or less
$ 10,874
Over 3 through 6 months
5,470
Over 6 through 12 months
12,663
Over 1 through 3 years
8,409
Over 3 years
1,472
Total
$ 38,888

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~~(7)~~(8)

Securities Sold Under Agreements to Repurchase

~~Securities sold under agreements to repurchase, which~~SSUAR represent ~~excess funds from~~a funding source of Bancorp and are primarily used by commercial customers ~~as part of a~~in conjunction with collateralized corporate cash management ~~service, totaled $58.8 million~~accounts. Such repurchase agreements are considered financing agreements and ~~$70.5 million at~~ mature within one business day from the transaction date. At June 30, ~~2018 and December 31, 2017, respectively. Bancorp enters into sales of securities under agreement to repurchase at a specified future date. At June 30, 2018,~~ 2019, 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~~controlled by Bancorp.

~~Table of Contents~~

Information concerning SSUAR follows:

(Dollars in thousands)	June 30, 2019			December 31, 2018
Outstanding balance at end of period	$	33,809		$	36,094
Weighted average interest rate at end of period		0.31	%		0.24	%

~~Stock Yards Bancorp, inc. and subsidiary~~

	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2019			2018			2019			2018
Average outstanding balance during the period	$	39,969		$	61,993		$	38,755		$	66,609
Average interest rate during the period		0.28	%		0.21	%		0.28	%		0.20
Maximum outstanding at any month end during the period	$	43,160		$	60,801		$	43,160		$	74,725

~~(8)~~(9)

Federal Home Loan Bank Advances

Bancorp had outstanding ~~borrowings~~58 separate advances totaling ~~$48.8~~$84.3 million ~~and $49.5 million at~~ as of June 30, ~~2018 and~~ 2019, as compared with 14 separate advances totaling $48.2 million as of December 31, ~~2017, respectively, via 14 separate fixed-rate advances.~~2018. As a result of the King acquisition, Bancorp assumed 46 advances totaling $43.3 million, with maturities ranging from 2019 to 2028. These advances were discounted to fair value as of the acquisition date. See the acquisition footnote for details. As of June 30, ~~2018,~~ 2019, for ~~two~~16 advances totaling ~~$30~~$51 million, ~~both~~all of which are non-callable, interest payments are due monthly, with principal due at maturity. For the remaining advances, ~~totaling $18.8 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)	June 30, 2019					December 31, 2018
Maturity			Weighted average					Weighted average
Year	Advance		Fixed Rate			Advance		Fixed Rate
2019	$	30,850		2.42	%	$	30,000		2.54	%
2020		20,390		2.38			1,691		2.23
2021		2,561		2.46			215		2.12
2023		579		1.01			—		—
2024		2,131		2.36			2,240		2.36
2025		4,192		2.42			4,626		2.42
2026		8,470		1.95			8,185		1.99
2027		8,771		1.75			—		—
2028		6,335		2.38			1,220		1.49

Total	$	84,279		2.28	%	$	48,177		2.39	%

(In thousands)

June 30, 2018

December 31, 2017

Year

Advance

Fixed Rate

Advance

Fixed Rate

2018
$ 30,000 2.13
%
$ 30,000 1.48
%
2020
1,716 2.23 1,741 2.23
2021
251 2.12 288 2.12
2024
2,348 2.36 2,454 2.36
2025
4,889 2.42 5,149 2.42
2026
8,376 1.99 8,564 1.99
2028
1,241 1.49 1,262 1.49

Total
$ 48,821 2.13
%
$ 49,458 1.74
%

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~~In addition to fixed-rate~~FHLB advances listed above, Bancorp had cash management advances from the FHLB of $275 million, and $150 million as of June 30, 2018 and December 31, 2017, respectively. These advances typically have a term of one week. $200 million of the $275 million advances as of June 30, 2018, and all of the $150 million in advances as of December 31, 2017 were part of a quarterly tax minimization strategy and matured in the first week following the end of the quarter. $75 million of the June 30, 2018 advances were used to supplement liquidity as part of Bancorp’s management of its’ overall cash position. Due to the short-term nature of the cash management advances, they were recorded on the consolidated balance sheet within federal funds purchased.

~~Advances from the FHLB~~ are collateralized by certain commercial and residential real estate mortgage loans under a blanket mortgage collateral pledge agreement and FHLB stock. Bancorp ~~believes~~views these ~~borrowings~~advances to be an effective alternative to ~~higher cost time~~brokered deposits to ~~manage interest rate risk associated with long-term fixed rate loans.~~fund loan growth. At June 30, 2019, and December 31, 2018, the amount of available credit from the FHLB totaled ~~$205.8 million.~~$484.0 million, and $537.0 million, respectively. Bancorp also had $105 million in federal funds lines available from correspondent banks at both June 30, 2019, and December 31, 2018.

~~(9)~~(10)

Other Comprehensive Income (Loss)

The following tables illustrate activity within the balances in accumulated other comprehensive income ~~(AOCI)~~(“OCI”) by component, and is shown for the three and six month periods ended June 30, 2018 and 2017. The tables also include $506 thousand reclassified from AOCI to retained earnings related to the adoption of ASU 2018-02 in the first quarter of 2018. ASU 2018-02 provides for the reclassification of tax effects stranded in other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act into retained earnings. The Tax Reform reduced the US Federal corporate tax rate from 35% to 21% effective January 1, 2018. As a result, Bancorp was required to remeasure its net deferred tax assets at the lower rate and recognize the adjustment through income tax expense in 2017. The adjustment through income tax expense left items presented in AOCI, for which the related income tax effects were originally recognized in other comprehensive income, unadjusted for the new tax rate. The reclassification upon adoption of ASU 2018-02 results in AOCI reflecting the new tax rate.component:

	Net unrealized			Net unrealized			Minimum
	gains (losses)			gains (losses)			pension
Three months ended June 30, 2019	on securities			on cash			liability
(In thousands)	available for sale			flow hedges			adjustment			Total

Balance, beginning of period	$	(2,536	)	$	234		$	(211	)	$	(2,513	)
Net current period other comprehensive income (loss)		3,827			(248	)		—			3,579
Balance, end of period	$	1,291		$	(14	)	$	(211	)	$	1,066

Three months ended June 30, 2018
Balance, beginning of period	$	(5,995	)	$	544		$	(393	)	$	(5,844	)
Net current period other comprehensive income (loss)		(1,279	)		79			—			(1,200	)
Balance, end of period	$	(7,274	)	$	623		$	(393	)	$	(7,044	)

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~~Stock Yards Bancorp, inc. and subsidiary~~

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 March 31, 2017
$ (522 ) $ 69 $ (272 ) $ (725 )

Net current period other comprehensive gain (loss)
206 (90 ) - 116
Balance at June 30, 2017
$ (316 ) $ (21 ) $ (272 ) $ (609 )

Balance at March 31, 2018
$ (5,995 ) $ 544 $ (393 ) $ (5,844 )

Net current period other comprehensive income gain (loss)
(1,279 ) 79 - (1,200 )
Balance at June 30, 2018
$ (7,274 ) $ 623 $ (393 ) $ (7,044 )

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, 2016
$ (1,211 ) $ (16 ) $ (272 ) $ (1,499 )

Net current period other comprehensive gain (loss)
895 (5 ) - 890
Balance at June 30, 2017
$ (316 ) $ (21 ) $ (272 ) $ (609 )

Balance at December 31, 2017 (1)
$ (1,781 ) $ 193 $ (342 ) $ (1,930 )

Net current period other comprehensive income gain (loss)
(4,997 ) 389 - (4,608 )
Reclassification adjustment under ASU 2018-02
(496 ) 41 (51 ) (506 )
Balance at June 30, 2018
$ (7,274 ) $ 623 $ (393 ) $ (7,044 )

~~(1)~~

December 31, 2017 AOCI component balances reflect a correction of incorrectly reported year-end balances in Note 12 of the 2017 Form 10-K, which were presented as $(2,278), $234, and $(392) for securities available-for-sale, cash flow hedges, and minimum pension liability, respectively.

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

	Net unrealized			Net unrealized			Minimum
	gains (losses)			gains (losses)			pension
Six months ended June 30, 2019	on securities			on cash			liability
(In thousands)	available for sale			flow hedges			adjustment			Total

Balance, beginning of period	$	(5,330	)	$	408		$	(220	)	$	(5,142	)
Net current period other comprehensive income (loss)		6,621			(422	)		9			6,208
Balance, end of period	$	1,291		$	(14	)	$	(211	)	$	1,066

Six months ended June 30, 2018
Balance, beginning of period	$	(1,781	)	$	193		$	(342	)	$	(1,930	)
Net current period other comprehensive income (loss)		(4,997	)		389			—		$	(4,608	)
Reclassification adjustment for adoption of ASU 2018-02		(496	)		41			(51	)		(506	)
Balance, end of period	$	(7,274	)	$	623		$	(393	)	$	(7,044	)

~~(10)~~(11)

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.

~~(11)~~(12)

Net Income Per Share

The following table reflects, for the three ~~and six~~ months ended June 30, ~~2018~~ 2019 and ~~2017,~~2018, net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:

	Three months ended				Six months ended
	June 30,				June 30,
(In thousands, except per share data)	2019		2018		2019		2018
Net income	$	16,543	$	13,579	$	32,184	$	26,983

Weighted average shares outstanding - basic		22,689		22,625		22,675		22,601
Dilutive securities		260		342		273		358
Weighted average shares outstanding- diluted		22,949		22,967		22,948		22,959

Net income per share, basic	$	0.73	$	0.60	$	1.42	$	1.19
Net income per share, diluted		0.72		0.59		1.40		1.17

Three months ended

Six months ended

(In thousands, except per share data)

June 30,

June 30,

2018

2017

2018

2017

Net income
$ 13,579 $ 10,602 $ 26,983 $ 21,393
Average shares outstanding
22,625 22,538 22,601 22,515
Dilutive securities
354 458 374 483

Average shares outstanding including dilutive securities including dilutive securities
22,979 22,996 22,975 22,998

Net income per share, basic
$ 0.60 $ 0.47 $ 1.19 $ 0.95
Net income per share, diluted
$ 0.59 $ 0.46 $ 1.17 $ 0.93
33

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Stock appreciation rights (“SARs”) excluded from the earnings per share calculation because their impact was antidilutive follows:

As of June 30, 2018, SARs totaling 47,410 granted in March 2017 and January 2018 with strike prices of $40 and $38.30, respectively, were not included in the six months ended June 30 EPS calculation, nor were 46,410 issued in March 2017 included in the quarterly calculation as they were antidilutive;

Three

Six

months ended

(In thousands)

June 30,

2019

2018

2019

2018

Antidilutive SARs

200

These shares while antidilutive, could however, ~~they could~~ be dilutive to ~~EPS~~earnings per share (“EPS”) in the future.

~~(12)~~(13)

Defined Benefit Plan

Bancorp sponsors an unfunded, non-qualified, defined benefit retirement plan for three key officers ~~(two~~(one current and ~~one~~two retired), and has no plans to increase the number of or benefits to participants. ~~Benefits vest based on 25 years of service and all~~All participants are fully vested. Actuarially determined pension costs are expensed and accrued over the service period, and benefits are paid from Bancorp’s assets. ~~Information about~~Bancorp maintains life insurance policies, for which it is the ~~components~~beneficiary, on participants and certain former executives. Income from these policies is utilized to offset costs of ~~the net~~benefits. Net periodic benefit cost ~~of the defined benefit plan, recorded in compensation expense, is as follows:~~

Three months ended

Six months ended

June 30,

June 30,

2018

2017

2018

2017

(In thousands)

Components of net periodic benefit cost

Service cost
$ - $ - $ - $ -
Interest cost (1)
20 18 40 36
Expected return on plan assets
- - - -
Amortization of prior service cost
- - - -
Amortization of net losses (1)
18 17 36 33
Net periodic benefit cost
$ 38 $ 35 $ 76 $ 69

~~(1) Bancorp elected as a practical expedient to use amounts disclosed in the 2017 consolidated financial statements as a basis~~was immaterial for ~~estimating quarterly application of components of defined benefit cost.~~

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~~Stock Yards Bancorp, inc. and subsidiary~~

all respective periods.

~~(13)~~(14)

Stock-Based Compensation

The fair value of all stock-based 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. ~~The 2005 Stock Incentive Plan expired in April 2015; however,~~In 2018 shareholders approved an additional 500 thousand ~~additional~~ shares ~~were made available in~~for issuance under the ~~second quarter of 2018. SARs granted under this plan expire as late as 2025.~~plan. As of June 30, ~~2018,~~ 2019, there were ~~694,533~~505 thousand shares available for future awards.

~~Options, which have not been granted since 2007, generally~~Stock Options – Bancorp had ~~a vesting schedule~~no stock options outstanding as of ~~20%. The last remaining options were exercised in the first quarter of 2017.~~June 30, 2019 and December 31, 2018.

~~Stock appreciation rights (“SARs”)~~SARs – SARs granted have a vesting schedule of 20% per year and expire ~~ten~~10 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 forward, 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 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. Grants require a one year post-vesting holding periods and the fair value of such grants incorporates a liquidity discount related to the holding period of 4.26%, 5.12% and 4.50% for 2018, 2017, and 2016, respectively.

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

For six months ended

June 30,

June 30,

(In thousands)

2018

2017

2018

2017

Stock-based compensation expense before income taxes
$ 1,213 $ 682 $ 2,035 $ 1,342

Less: deferred tax benefit
(255 ) (239 ) (427 ) (470 )
Reduction of net income
$ 958 $ 443 $ 1,608 $ 872

Bancorp expects to record an additional $1.8 million of stock-based compensation expense in 2018 for equity grants outstanding as of June 30, 2018. As of June 30, 2018, Bancorp has $6.8 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 used cash of $155 thousand during the first six months of 2018 for the purchase of shares upon the vesting of restricted stock units. This compares with cash used of $216 thousand during the first six months of 2017 for the purchase of shares upon the vesting of restricted stock units net of cash received for options exercised.

Fair values of ~~Bancorp’s~~ 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.~~such value. This model requires ~~use~~the input of assumptions, changes to which can materially affect the fair value estimate. The following assumptions were used in SAR valuations at the grant date in each year:

	2019			2018

Dividend yield		2.54	%		2.56	%
Expected volatility		20.39	%		20.17	%
Risk free interest rate		2.52	%		2.96	%
Expected life of SARs (in years)		7.2			7.0

2018

2017

Dividend yield
2.57 % 2.72 %
Expected volatility
20.60 % 19.47 %
Risk free interest rate
2.82 % 2.29 %
Expected life of SARs (in years)
7.0 7.0

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.~~awards. The expected life of SARs is based on ~~actual~~past experience of ~~past like-term~~similar-life SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.

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Restricted stock awards (“RSAs”) – RSAs granted to officers vest over 5 years. For all grants prior to 2015, grantees are entitled to dividend payments during the vesting period. For grants in 2015 and forward, forfeitable dividends are deferred until shares are vested. Fair value of RSAs is equal to the market value of the shares on the date of grant.

Grants of performance stock units (“PSUs”) – PSUs vest based upon service and a 3-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 market value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Grants require a 1 year post-vesting holding period and the fair value of such grants incorporates a liquidity discount related to the holding period of 4.1%, 4.3% and 5.1% for 2019,2018, and 2017, respectively.

Grants of restricted stock units (“RSUs”) – RSUs are only granted to non-employee 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 equals market value of underlying shares on the date of grant.

Bancorp utilized cash of $272 thousand during the firstsix months of 2019 for the purchase of shares upon the vesting of RSUs. This compares with cash used of $155 thousand during the firstsix months of 2018 for the purchase of shares.

In the first quarter of 2019, Bancorp awarded 9,834 RSUs to non-employee directors of Bancorp with a grant date fair value of $330 thousand.

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~~Stock Yards~~ Bancorp ~~inc.~~has recognized stock-based compensation expense for SARs, RSAs, and ~~subsidiary~~PSUs within compensation expense, and RSUs for directors within other non-interest expense, as follows:

	Three months ended June 30, 2019
(In thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total

Expense	$	86		$	306		$	83		$	518		$	993
Deferred tax benefit		(18	)		(65	)		(17	)		(109	)		(209	)
Total net expense	$	68		$	241		$	66		$	409		$	784

	Three months ended June 30, 2018
(In thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total

Expense	$	77		$	275		$	62		$	798		$	1,212
Deferred tax benefit		(16	)		(58	)		(13	)		(167	)		(254	)
Total net expense	$	61		$	217		$	49		$	631		$	958

	Six months ended June 30, 2019
(In thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total

Expense	$	170		$	599		$	164		$	923		$	1,856
Deferred tax benefit		(36	)		(126	)		(34	)		(194	)		(390	)
Total net expense	$	134		$	473		$	130		$	729		$	1,466

	Six months ended June 30, 2018
(In thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total

Expense	$	150		$	551		$	124		$	1,210		$	2,035
Deferred tax benefit		(32	)		(116	)		(26	)		(253	)		(427	)
Total net expense	$	118		$	435		$	98		$	957		$	1,608

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As of June 30, 2019, Bancorp has $7.4 million of unrecognized stock-based compensation expense estimated to be recorded as follows:

(In thousands) Year ended	Stock Appreciation Rights		Restricted Stock Awards		Restricted Stock Units		Performance Stock Units		Total

Remainder of 2019	$	175	$	599	$	166	$	999	$	1,939
2020		306		1,049		2		1,325		2,682
2021		248		830		—		466		1,544
2022		193		559		—		—		752
2023		118		308		—		—		426
2024		11		25		—		—		36
Total estimated expense	$	1,051	$	3,370	$	168	$	2,790	$	7,379

~~A summary of stock option and~~The following table summarizes SARs activity and related ~~information for the twelve month period ended December 31, 2017 and the six month period ended June 30, 2018 follows:~~information:

														Weighted														Weighted
								Weighted		Aggregate		Weighted		average								Weighted				Weighted		average
	Options							average		intrinsic		average		remaining								average		Aggregate		average		remaining
	and SARs			Exercise				exercise		value		fair		contractual					Exercise			exercise		intrinsic		fair		contractual
(In thousands, except per share data)																SARs			price			price		value(1)		value		life (in years)
	(In thousands)			price				price		(In thousands)		value		life (In years)

At December 31, 2016
Vested and exercisable		475			$14.02	-	24.56	$	15.72	$	14,820	$	3.16		4.3
Unvested		260			15.24	-	33.08		21.53		6,623		3.43		7.8
Total outstanding		735			14.02	-	33.08		17.78		21,443		3.26		5.5


Outstanding, January 1, 2018																	704		$14.02	-	$40.00	$	19.51	$	12,923	$	3.47		5.1
Granted		46			40.00	-	40.00		40.00		-		6.34				100		35.90	-	39.32		37.75		—		6.07
Exercised		(77	)		14.02	-	17.89		15.41		1,855		3.18				(73	)	14.02	-	19.37		15.32		1,654		3.43
Forfeited		-				-			-		-		-				—			-			-		—		—
Outstanding, December 31, 2018																	731		$14.02	-	$40.00	$	22.42	$	8,422	$	3.82		5.2

At December 31, 2017
Vested and exercisable		490			14.02	-	33.08		16.46		10,408		3.16		4.0
Unvested		214			15.26	-	40.00		26.46		2,515		4.17		7.7
Total outstanding		704			14.02	-	40.00		19.51		12,923		3.47		5.1


Outstanding, January 1, 2019																	731		$14.02	-	$40.00	$	22.42	$	8,422	$	3.82
Granted		46			35.90	-	38.30		35.95		102		6.66				53		36.65	-	38.18		37.01		—		6.24
Exercised		(62	)		14.02	-	19.37		15.42		1,459		3.41				(47	)	14.02	-	22.96		17.16		830		3.62
Forfeited		-				-			-		-		-				—			-			-		—		—
Outstanding, June 30, 2019																	737		$14.02	-	$40.00	$	23.79	$	9,505	$	4.01		5.0

At June 30, 2018

Vested and exercisable		502			14.02	-	40.00		17.62		10,331		3.22		4.2		525		$14.02	-	$40.00	$	19.20	$	8,975	$	3.38		3.5
Unvested		186			19.37	-	40.00		30.08		1,570		4.96		8.0		212		22.96	-	40.00		35.14		530		5.58		8.5
Total outstanding		688			14.02	-	40.00		20.99		11,901		3.69		5.2
Outstanding, June 30, 2019																	737		$14.02	-	$40.00	$	23.79	$	9,505	$	4.01		5.0

Vested year-to-date		75			$15.26	-	40.00	$	23.35	$	1,123	$	3.77
Vested at June 30, 2019																	79		$19.37	-	$40.00	$	27.39	$	740	$	4.55

~~Intrinsic~~(1) - 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 grantprice.

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~~Stock Yards Bancorp, inc. and subsidiary~~The following table summarizes activity for RSAs granted to officers:

				Grant date
				weighted
(In thousands, except per share data)	RSAs			average cost

Unvested at January 1, 2018		119		$	27.62
Shares awarded		40			35.89
Restrictions lapsed and shares released		(44	)		23.62
Shares forfeited		(5	)		31.35
Unvested at December 31, 2018		110		$	32.09

Unvested at January 1, 2019		110		$	32.09
Shares awarded		39			34.88
Restrictions lapsed and shares released		(39	)		28.70
Shares forfeited		—			—
Unvested at June 30, 2019		110		$	34.32

~~A summary of activity~~Expected shares to be awarded for ~~the twelve month period ending December 31, 2017 and the six month period ending June 30, 2018 for restricted shares of common stock~~PSUs granted ~~to officers is in the following table:~~

Grant date

weighted-

Number

average cost

Unvested at December 31, 2016
145,235 $ 21.57
Shares awarded
28,625 44.85
Restrictions lapsed and shares released
(46,797 ) 19.79
Shares forfeited
(7,691 ) 25.18
Unvested at December 31, 2017
119,372 27.62

Shares awarded
38,205 36.00
Restrictions lapsed and shares released
(44,372 ) 23.58
Shares forfeited
(2,488 ) 30.35
Unvested at June 30, 2018
110,717 $ 32.07

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

Vesting

Expected

Grant

period

Fair

shares to

year

in years

value

be awarded

2016
3 $ 22.61 69,161
2017
3 35.66 61,893
2018
3 31.54 50,352

~~In the first quarter of 2018, Bancorp awarded 6,525 RSUs to directors of Bancorp with a grant date fair value of $247 thousand.~~

	Vesting				Expected
Grant	period		Fair		shares to
year	in years		value		be awarded
2017		3	$	35.66		61,893
2018		3		31.54		71,932
2019		3		32.03		43,602

~~(14)~~(15)

Commitments and Contingent Liabilities

As of June 30, 2019 and December 31, 2018, Bancorp had various commitments outstanding that arose in the normal course of business, ~~including standby letters~~such as unused commitments or lines of credit and commitments made to ~~extend credit,~~lend in the future, which are properly not reflected in the consolidated financial statements. ~~In management’s opinion, at June 30, 2018~~Total off balance sheet commitments to extend credit of $687.7 million, including standby letters of credit of $18.9 million, represent normal banking transactions. Commitments to extend credit were $688.3 million, including letters of credit of $14.8 million, as of December 31, 2017. follows:

(In thousands)	June 30, 2019		December 31, 2018
Commercial and Industrial	$	381,824	$	309,920
Construction - Commercial		224,641		163,314
Construction - Residential		15,631		16,050
Home Equity		154,030		147,907
Credit Cards		21,222		20,003
Overdrafts		21,777		21,751
Letters of credit		23,359		20,891
Other		43,572		33,369
Future loan commitments		213,687		101,399

Total off balance sheet commitments to extend credit	$	1,099,743	$	834,604

Commitments to extend credit are an agreement to lend to a customer as long as collateral is available as agreed upon 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, securities, equipment, and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments. At June 30, 2019 and December 31, 2018, Bancorp ~~has recorded~~had accrued $350 thousand in other liabilities for inherent risks related to unfunded credit commitments.

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Standby letters of credit and financial guarantees written are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party. Those guarantees are primarily issued to support customer commercial transactions. Standby letters of credit generally have maturities of ~~one~~1 to ~~two~~2 years.

As of June 30, ~~2018,~~ 2019, 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.

~~(15)~~(16)

Assets and Liabilities Measured and Reported at Fair Value

~~Bancorp follows~~Fair value represents 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. Bancorp adopted ASU 2016-01, ~~Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,~~ effective January 1, 2018. The most significant change impacting Bancorp was a change in valuation methods for the loan portfolio for fair value reporting. GAAP no longer allows for valuing financial instruments for fair value purposes using an “entrance” pricing methodology. The use of an “exit” price methodology requires greater assumptions regarding life of loan losses and is a more complex calculation, the results of which can be seen below.

~~Authoritative guidance defines fair value as the~~exchange price that would be received ~~to sell~~for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants aton the measurement date. ~~The guidance also establishes a hierarchy to group assets and liabilities carried at fair value in~~ There are three levels ~~based upon the markets in which the assets and liabilities trade and the reliability~~ of ~~assumptions~~inputs that may be used to ~~determine~~measure fair ~~value. These levels are:~~values:

●

Level 1: Valuation is based upon quoted (unadjusted) 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.

Authoritative guidance requires ~~maximum~~maximization of use of observable inputs and ~~minimum~~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.

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~~Stock Yards Bancorp, inc.~~ At June 30, 2019 and ~~subsidiary~~

December 31, 2018, Bancorp’s ~~investment~~ securities ~~available-for-sale~~available for sale portfolio and interest rate swaps ~~are~~were 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~~available for sale 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.~~2.

~~Interest rate swaps are valued using primarily Level 2 inputs.~~ Fair value measurements ~~generally~~for interest rate swaps are 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 counterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during ~~2018.~~the reporting period. Interest rate swaps are valued using primarily Level 2 inputs.

~~Below~~Mortgage servicing rights, impaired loans and OREO are recorded at fair value on a non-recurring basis, generally in the ~~carrying~~application of lower of cost or market adjustments or write-downs of specific assets.

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Carrying values of assets measured at fair value on a recurring ~~basis.~~basis follows:

(In thousands)

Fair value at June 30, 2018

Assets

Total

Level 1

Level 2

Level 3

Investment securities available-for-sale

Government sponsored enterprise obligations
$ 388,596 $ - $ 388,596 $ -
Mortgage-backed securities - government agencies
143,135 - 143,135 -
Obligations of states and political subdivisions
42,839 - 42,839 -

Total investment securities available-for-sale
574,570 - 574,570 -

Interest rate swaps
2,214 - 2,214 -

Total assets
$ 576,784 $ - $ 576,784 $ -

Liabilities

Interest rate swaps
$ 1,461 $ - $ 1,461 $ -

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~~Stock Yards Bancorp, inc. and subsidiary~~

(In thousands)	Fair value at June 30, 2019
Assets	Total		Level 1		Level 2		Level 3
Securities available for sale:
Government sponsored enterprise obligations	$	268,015	$	—	$	268,015	$	—
Mortgage backed securities - government agencies		131,598		—		131,598		—
Obligations of states and political subdivisions		23,966		—		23,966		—

Total Securities available for sale		423,579		—		423,579		—

Interest rate swaps		1,813		—		1,813		—

Total assets	$	425,392	$	—	$	425,392	$	—

Liabilities

Interest rate swaps	$	1,849	$	—	$	1,849	$	—

(In thousands)	Fair value at December 31, 2017								Fair value at December 31, 2018
Assets	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Investment securities available-for-sale
U.S. Treasury and other U.S. government obligations	$	149,984	$	149,984	$	-	$	-
Securities available for sale:
Government sponsored enterprise obligations		213,844		-		213,844		-	$	261,039	$	—	$	261,039	$	—
Mortgage-backed securities - government agencies		161,507		-		161,507		-
Mortgage backed securities - government agencies										146,277		—		146,277		—
Obligations of states and political subdivisions		49,189		-		49,189		-		29,679		—		29,679		—


Total investment securities available-for-sale		574,524		149,984		424,540		-
Total Securities available for sale										436,995		—		436,995		—

Interest rate swaps		579		-		579		-		1,035		—		1,035		—

Total assets	$	575,103	$	149,984	$	425,119	$	-	$	438,030	$	—	$	438,030	$	—

Liabilities

Interest rate swaps	$	259	$	-	$	259	$	-	$	543	$	—	$	543	$	—

Bancorp had ~~no financial~~nofinancial instruments classified within Level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis at June 30, ~~2018~~ 2019 or December 31, ~~2017.~~2018.

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~~MSRs are recorded~~

Discussion of assets measured at fair value ~~upon capitalization,~~on a non-recurring basis follows:

Mortgage Servicing Rights – On at least a quarterly basis, MSRs are ~~amortized to correspond with estimated servicing income, and are periodically assessed~~evaluated for impairment based onupon the fair value atof the ~~reporting date.~~MSRs as compared to carrying amount. 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 June 30, ~~2018~~ 2019 and December 31, ~~2017~~ 2018, there was ~~no valuation~~novaluation allowance for the mortgage servicing rights, as the fair value exceeded the cost. Accordingly, the MSRs are not included in ~~either table below~~the following tabular disclosure for June 30, ~~2018~~ 2019 or December 31, ~~2017. See Note 4 for more information regarding MSRs.~~

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~2018.

~~For~~Impaired loans - Collateral-dependent impaired loans ingenerally reflect partial charge-downs to their respective fair value, which is commonly based on recent real estate appraisals or other sources of valuations based upon the ~~table below,~~underlying collateral. Also, fair value is calculated as the carrying value of ~~only~~ loans with a specific valuation allowance, less the specific ~~allowance, and the carrying value of collateral dependent loans that have been charged down to their fair value.~~valuation allowance. Fair value of impaired loans was primarily measured based on the value of 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 real estate 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. For other assets, Bancorp relies on both internal and third party assessments of asset value, based on information provided by the borrower, following methodologies similar to those described for real estate. As of June 30, ~~2018,~~ 2019, total impaired collateral dependent loans charged down to their fair value and impaired loans with a valuation allowance were ~~$5.4 million,~~$389 thousand, and the specific allowance totaled ~~$677~~$37 thousand, resulting in a fair value of ~~$4.7 million,~~$352 thousand, compared with total collateral dependent loans charged down to their fair value and impaired loans with a valuation allowance of ~~$2.6 million,~~$967 thousand, and the specific allowance allocation totaling ~~$48~~$42 thousand, resulting in a fair value of ~~$2.6 million~~$925 thousand at December 31, ~~2017.~~ 2018. Losses represent charge offs and changes in specific allowances for the periods indicated.

Other real estate owned (“OREO”)~~, which is carried~~ - Assets acquired through or instead of loan foreclosure are initially recorded at ~~the~~fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value ~~is periodically assessed for impairment based on fair value at the reporting date.~~less estimated costs to sell. Fair value is commonly based on recent real estate 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 following 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 June 30, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, carrying value of all other real estate owned was ~~$360~~$563 thousand and ~~$2.6~~$1.0 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 June 30, 2018								Losses for 6 month			Fair value at June 30, 2019								Losses recorded:
									period ended											Three months		Six months
	Total		Level 1		Level 2		Level 3		June 30, 2018											ended		ended
Collateral dependent impaired loans	$	4,735	$	-	$	-	$	4,735	$	(1,419	)
												Total		Level 1		Level 2		Level 3		June 30, 2019		June 30, 2019
Impaired loans												$	352	$	—	$	—	$	352	$	—	$	—
Other real estate owned		360		-		-		360		-			239		—		—		239		—		—

Total	$	5,095	$	-	$	-	$	5,095	$	(1,419	)

(in thousands)

Fair value at December 31, 2017

Losses for 6 month

period ended

Total

Level 1

Level 2

Level 3

June 30, 2017

Collateral dependent impaired loans
$ 2,569 $ - $ - $ 2,569 $ (307 )
Other real estate owned
2,640 - - 2,640 (171 )

Total
$ 5,209 $ - $ - $ 5,209 $ (478 )

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

(In thousands)	Fair value at December 31, 2018								Losses recorded:
									Three months		Six months
									ended		ended
	Total		Level 1		Level 2		Level 3		June 30, 2018		June 30, 2018
Impaired loans	$	925	$	—	$	—	$	925	$	304	$	1,419
Other real estate owned		239		—		—		239		—		—

For the securities portfolio, Bancorp monitors the valuation technique used 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 six months ended June 30, 2018, 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 June 30, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, the significant unobservable inputs used in the fair value measurements are presented below.

June 30, 2018

Significant

Weighted

June 30, 2019

Fair

Valuation

unobservable

average of

Fair

Valuation

Unobservable

(weighted

(Dollars in thousands)

value

technique

input

input

value

technique

inputs

average)

Impaired loans - collateral dependent

4,735

Appraisal

Appraisal discounts

21.5

352

Appraisal

Appraisal discounts

10.0

Other real estate owned

360

Appraisal

Appraisal discounts

10.0

239

Appraisal

Appraisal discounts

22.0

December 31, 2018
	Fair		Valuation	Unobservable	(weighted
(Dollars in thousands)	value		technique	inputs	average)

Impaired loans - collateral dependent	$	925	Appraisal	Appraisal discounts		9.9	%
Other real estate owned		1,018	Appraisal	Appraisal discounts		12.2

December 31, 2017

Significant

Weighted

Fair

Valuation

unobservable

average of

(Dollars in thousands)

value

technique

input

input

Impaired loans - collateral dependent
$ 2,569
Appraisal

Appraisal discounts
11.5
%
Other real estate owned
2,640
Appraisal

Appraisal discounts
23.4

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~~Stock Yards Bancorp, inc. and subsidiary~~

~~(16)~~(17)

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

June 30, 2018

amount

Fair value

Level 1

Level 2

Level 3

Financial assets

Cash and short-term investments
$ 55,000 $ 55,000 $ 55,000 $ - $ -
Mortgage loans held for sale
2,053 2,142 - 2,142 -
Federal Home Loan Bank stock and other securities
10,370 10,370 - 10,370 -
Loans, net
2,553,087 2,551,409 - - 2,551,409
Accrued interest receivable
8,743 8,743 8,743 - -

Financial liabilities

Deposits
2,540,461 2,538,054 - - 2,538,054
Short-term borrowings
345,268 345,268 - 345,268 -
FHLB advances
48,821 47,374 - 47,374 -
Accrued interest payable
500 500 500 - -

(In thousands)	Carrying
June 30, 2019	amount		Fair value		Level 1		Level 2		Level 3

Assets
Cash and cash equivalents	$	116,039	$	116,039	$	116,039	$	—	$	—
Mortgage loans held for sale		3,922		4,023		—		4,023		—
Federal Home Loan Bank stock		11,316		11,316		—		11,316		—
Loans, net		2,737,464		2,749,157		—		—		2,749,157
Accrued interest receivable		9,633		9,633		9,633		—		—

Liabilities
Non-interest bearing deposits		777,652		777,652		777,652		—		—
Transaction deposits		1,671,016		1,671,016		—		1,671,016		—
Time deposits		434,785		436,451		—		436,451		—
Securities sold under agreement to repurchase		33,809		33,809		—		33,809		—
Federal funds purchased		12,012		12,012		—		12,012		—
FHLB advances		84,279		84,505		—		84,505		—
Accrued interest payable		1,008		1,008		1,008		—		—

(In thousands)

Carrying

December 31, 2017

amount

Fair value

Level 1

Level 2

Level 3

Financial assets

Cash and short-term investments
$ 139,248 $ 139,248 $ 139,248 $ - $ -
Mortgage loans held for sale
2,964 2,964 - 2,964 -
Federal Home Loan Bank stock and other securities
7,646 7,646 - 7,646 -
Loans, net
2,384,685 2,338,464 - - 2,338,464
Accrued interest receivable
8,369 8,369 8,369 - -

Financial liabilities

Deposits
2,578,295 2,576,385 - - 2,576,385
Short-term borrowings
231,825 231,825 - 231,825 -
FHLB advances
49,458 48,642 - 48,642 -
Accrued interest payable
232 232 232 - -

(In thousands)	Carrying
December 31, 2018	amount		Fair value		Level 1		Level 2		Level 3

Assets
Cash and cash equivalents	$	198,939	$	198,939	$	198,939	$	—	$	—
Mortgage loans held for sale		1,675		1,743		—		1,743		—
Federal Home Loan Bank stock		10,370		10,370		—		10,370		—
Loans, net		2,522,637		2,508,587		—		—		2,508,587
Accrued interest receivable		8,360		8,360		8,360		—		—

Liabilities
Non-interest bearing deposits		711,023		711,023		711,023		—		—
Transaction deposits		1,736,618		1,736,618		—		1,736,618		—
Time deposits		346,715		345,273		—		345,273		—
Securities sold under agreement to repurchase		36,094		36,094		—		36,094		—
Federal funds purchased		10,247		10,247		—		10,247		—
FHLB advances		48,177		47,227		—		47,227		—
Accrued interest payable		762		762		762		—		—

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~~

~~(17)~~(18)

Derivative Financial Instruments

Periodically, Bancorp enters into an interest rate swap ~~transaction~~transactions with ~~a borrower,~~borrowers who ~~desires~~desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the 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 have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements for the firstsix months of ~~2018~~2019 were offsetting and therefore had no 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, collateral, and monitoring procedures, and does not expect any counterparties to fail their obligations.

Table of Contents

At June 30, ~~2018~~ 2019 and December 31, ~~2017,~~ 2018, Bancorp had outstanding undesignated interest rate swap contracts as follows:

(Dollar amounts in thousands)	Receiving				Paying
(Dollars in thousands)									Receiving				Paying
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2018		2017		2018		2017		2019		2018		2019		2018
Notional amount	$	61,555	$	54,964	$	61,555	$	54,964	$	60,607	$	55,505	$	60,607	$	55,505
Weighted average maturity (years)		8.5		8.7		8.5		8.7		7.4		8.0		7.4		8.0
Fair value	$	1,426	$	259	$	1,461	$	283	$	1,813	$	519	$	1,835	$	543

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. In 2016, Bancorp entered into an interest rate swap to hedge cash flows of a $10 million rolling fixed-rate ~~three-month~~three-month FHLB borrowing. The swap began December 6, 2016 and ends December 6, 2021. ~~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, rolling fixed rate advances are considered to be floating rate liabilities. 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.

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

The following table details Bancorp’s derivative position designated as a cash flow hedge, and the fair values as of June 30, ~~2018~~ 2019 and December 31, ~~2017.~~2018.

Notional

Maturity

Receive (variable)

Pay fixed

assets (liabilities)

amount

date

index

swap rate

June 30, 2018

December 31, 2017

$ 10,000
12/6/2021

US 3 Month LIBOR
1.89 % $ 311 $ 106
20,000
12/6/2020

US 3 Month LIBOR
1.79 % 477 190
$ 30,000 1.82 % $ 788 $ 296

(Dollars in thousands)
							Fair value
Notional		Maturity	Receive (variable)	Pay fixed			assets (liabilities)
amount		date	index	swap rate			June 30, 2019			December 31, 2018
$	10,000	12/6/2021	US 3 Month LIBOR		1.89	%	$	(37	)	$	193
	20,000	12/6/2020	US 3 Month LIBOR		1.79	%		23			323
$	30,000				1.82	%	$	(14	)	$	516

~~(18)~~(19)

Regulatory Matters

Bancorp and the Bank are subject to ~~various~~capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, ~~prescribed~~in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by ~~banking regulations~~regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and ~~administered by state and federal banking agencies. Under these requirements, Bancorp~~the regulatory framework for prompt corrective action, the Holding Company and the Bank must meet ~~minimum~~specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital 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~~classification are ~~determined by applying certain risk weightings prescribed by regulation to various categories of assets and off-balance sheet commitments. Capital and risk weighted assets may be further~~also subject to qualitative judgments by the regulators ~~as to~~regarding components, risk ~~weighting~~weightings and other factors. Failure to meet capital requirements can result in certain mandatory, and possibly discretionary, corrective actions prescribed by regulation or determined to be necessary by regulators, which could materially affect the unaudited consolidated financial statements.

~~In 2013,~~Banking regulators have categorized the ~~Federal Reserve Board~~Bank as well-capitalized. For prompt corrective action, the regulations in accordance with Basel III define “well capitalized” as a 6.5% Common Equity Tier 1 Risk-Based Capital ratio, an 8.0% Tier 1 Risk-Based Capital ratio, a 10.0% Total Risk-Based Capital ratio and ~~the FDIC approved rules that substantially amended regulatory risk-based~~a 5.0% Tier 1 Leverage ratio. Additionally, in order to avoid limitations on capital ~~rules applicable~~distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and ~~the Bank. The rules implemented regulatory~~Bank must hold a capital ~~reforms~~conservation buffer composed 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. Basel III regulatory capital reforms became effective for Bancorp and the Bank on January Common Equity Tier 1 ~~2015, and include new~~ Risk-Based Capital above their minimum risk-based capital requirements. The capital conservation buffer phased in from 2016 to 2019 on the following schedule: a capital conservation buffer of 0.625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875% effective January 1, 2018; and ~~leverage ratios. Bancorp and the Bank met all~~a fully phased in capital ~~requirements to which they were subject as~~conservation buffer of ~~June 30, 2018.~~2.5% on January 1, 2019.

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~~Stock Yards~~ Bancorp ~~inc.~~continues to exceed the regulatory requirements for Total Risk Based Capital, Common Equity Tier I Risk Based, Tier I Risk Based Capital and ~~subsidiary~~

Tier I Leverage Capital. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the Capital Conservation Buffer.

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ~~ratios as of June 30, 2018 and December 31, 2017.~~ratios:

(Dollars in thousands)	Actual					Minimum for adequately capitalized					Minimum for well capitalized					Actual					Minimum for adequately capitalized					Minimum for well capitalized
June 30, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2019																Amount		Ratio			Amount		Ratio			Amount		Ratio

Total risk-based capital (1)
Consolidated	$	376,209		13.06	%	$	230,450		8.00	%	NA		NA			$	400,314		12.67	%	$	252,821		8.00	%	NA		NA
Bank		365,470		12.70			230,217		8.00		$	287,772		10.00	%		392,705		12.45			252,265		8.00		$	315,331		10.00	%

Common equity tier 1 risk-based capital
Consolidated		350,986		12.18			129,675		4.50		NA		NA				373,548		11.82			142,212		4.50		NA		NA
Bank		340,247		11.82			129,536		4.50			187,107		6.50			365,939		11.60			141,899		4.50			204,965		6.50

Tier 1 risk-based capital (1)
Consolidated		350,986		12.18			172,900		6.00		NA		NA				373,548		11.82			189,616		6.00		NA		NA
Bank		340,247		11.82			172,714		6.00			230,286		8.00			365,939		11.60			189,198		6.00			252,265		8.00

Leverage (2)
Consolidated		350,986		11.19			125,464		4.00		NA		NA				373,548		10.91			136,955		4.00		NA		NA
Bank		340,247		10.85			125,437		4.00			156,796		5.00			365,939		10.70			136,784		4.00			170,980		5.00

(Dollars in thousands)	Actual					Minimum for adequately capitalized					Minimum for well capitalized					Actual					Minimum for adequately capitalized					Minimum for well capitalized
December 31, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2018																Amount		Ratio			Amount		Ratio			Amount		Ratio

Total risk-based capital (1)
Consolidated	$	359,866		13.52	%	$	213,012		8.00	%	NA		NA			$	396,019		13.91	%	$	227,714		8.00	%	NA		NA
Bank		347,840		13.07			212,891		8.00		$	266,114		10.00	%		385,637		13.56			227,462		8.00		$	284,327		10.00	%

Common equity tier 1 risk-based capital
Consolidated		334,631		12.57			119,820		4.50		NA		NA				370,135		13.00			128,089		4.50		NA		NA
Bank		322,605		12.12			212,891		4.50			172,974		6.50			359,753		12.65			127,947		4.50			184,813		6.50

Tier 1 risk-based capital (1)
Consolidated		334,631		12.57			159,760		6.00		NA		NA				370,135		13.00			170,785		6.00		NA		NA
Bank		322,605		12.12			159,668		6.00			212,891		8.00			359,753		12.65			170,596		6.00			227,462		8.00

Leverage (2)
Consolidated		334,631		10.70			125,122		4.00		NA		NA				370,135		11.33			130,698		4.00		NA		NA
Bank		322,605		10.32			125,040		4.00			156,300		5.00			359,753		11.02			130,569		4.00			163,211		5.00

~~(1)~~(1)

Ratio is computed in relation to risk-weighted assets.

~~(2)~~(2)

Ratio is computed in relation to average assets.

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

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~~(19)~~(20)

Segments

Bancorp’s principal activities include commercial banking and ~~wealth management and trust.~~WM&T. 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 investment products sales activity. ~~Wealth management and trust~~WM&T provides financial management services including investment management, trust and estate administration, and retirement plan services.

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

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.

Principally, all of the net assets of ~~Stock Yards~~ Bancorp ~~Inc.~~ are involved in the commercial banking segment. ~~Bancorp has goodwill~~Goodwill of $12.8 million, of which $682 thousand ~~related~~relates to a bank acquisition in 1996, ~~which~~ and $12.1 million resulted from the King acquisition, has been assigned to the commercial banking segment. Assets assigned to ~~the Wealth Management & Trust Group (WM&T)~~WM&T primarily consist of net premises and ~~equipment, net of accumulated depreciation.~~equipment.

Selected financial information by business segment for the three and six month periods ended June 30, ~~2018~~ 2019 and ~~2017~~2018 follows:

			Wealth						Wealth
	Commercial		management				Commercial		Management
(In thousands)	banking		and trust		Total		Banking		and Trust		Total Company

Three months ended June 30, 2018
Three months ended June 30, 2019
Net interest income	$	28,612	$	62	$	28,674	$	30,690	$	84	$	30,774
Provision for loan losses		1,235		-		1,235
Provision								—		—		—
Wealth management and trust services		-		5,344		5,344		—		5,662		5,662
All other non-interest income		6,091		-		6,091		6,601		—		6,601
Non-interest expense		18,938		3,198		22,136
Income before income taxes		14,530		2,208		16,738
Non-interest expenses								22,297		3,167		25,464
Income before income tax expense								14,994		2,579		17,573
Income tax expense		2,644		515		3,159		471		559		1,030
Net income	$	11,886	$	1,693	$	13,579	$	14,523	$	2,020	$	16,543

Segment assets	$	3,321,948	$	1,892	$	3,323,840	$	3,462,105	$	1,718	$	3,463,823
Three months ended June 30, 2017

Three months ended June 30, 2018
Net interest income	$	25,165	$	80	$	25,245	$	28,612	$	62	$	28,674
Provision for loan losses		600		-		600
Provision								1,235		—		1,235
Wealth management and trust services		-		5,153		5,153		—		5,344		5,344
All other non-interest income		6,372		-		6,372		6,091		—		6,091
Non-interest expense		18,027		3,182		21,209
Income before income taxes		12,910		2,051		14,961
Non-interest expenses								18,938		3,198		22,136
Income before income tax expense								14,530		2,208		16,738
Income tax expense		3,626		733		4,359		2,644		515		3,159
Net income	$	9,284	$	1,318	$	10,602	$	11,886	$	1,693	$	13,579

Segment assets	$	3,124,522	$	2,240	$	3,126,762	$	3,321,948	$	1,892	$	3,323,840

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~~Stock Yards Bancorp, inc. and subsidiary~~

			Wealth
	Commercial		management
(In thousands)	Banking		and Trust		Total Company

Six months ended June 30, 2019
Net interest income	$	60,271	$	160	$	60,431
Provision		600		—		600
Wealth management and trust services		—		11,101		11,101
All other non-interest income		12,224		—		12,224
Non-interest expenses		41,903		6,200		48,103
Income before income tax expense		29,992		5,061		35,053
Income tax expense		1,771		1,098		2,869
Net income	$	28,221	$	3,963	$	32,184

Segment assets	$	3,462,105	$	1,718	$	3,463,823

Six months ended June 30, 2018
Net interest income	$	55,850	$	133	$	55,983
Provision		1,970		—		1,970
Wealth management and trust services		—		10,844		10,844
All other non-interest income		11,500		—		11,500
Non-interest expenses		36,798		6,365		43,163
Income before income tax expense		28,582		4,612		33,194
Income tax expense		5,210		1,001		6,211
Net income	$	23,372	$	3,611	$	26,983

Segment assets	$	3,321,948	$	1,892	$	3,323,840

Wealth

Commercial

management

(In thousands)

banking

and trust

Total

Six months ended June 30, 2018

Net interest income
$ 55,850 $ 133 $ 55,983
Provision for loan losses
1,970 - 1,970
Wealth management and trust services
- 10,844 10,844
All other non-interest income
11,500 - 11,500
Non-interest expense
36,798 6,365 43,163
Income before income taxes
28,582 4,612 33,194
Income tax expense
5,210 1,001 6,211
Net income
$ 23,372 $ 3,611 $ 26,983

Segment assets
$ 3,321,948 $ 1,892 $ 3,323,840
Six months ended June 30, 2017

Net interest income
$ 50,294 $ 157 $ 50,451
Provision for loan losses
1,500 - 1,500
Wealth management and trust services
- 10,247 10,247
All other non-interest income
11,900 - 11,900
Non-interest expense
35,975 6,229 42,204
Income before income taxes
24,719 4,175 28,894
Income tax expense
6,010 1,491 7,501
Net income
$ 18,709 $ 2,684 $ 21,393

Segment assets
$ 3,124,522 $ 2,240 $ 3,126,762
48

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~~(20)~~(21)

Revenue from Contracts with Customers

Bancorp adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers and all related amendments (ASC 606), which creates a single framework for recognizing revenue from contracts with customers that fall within its scope and revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, effective January 1, 2018 using the full retrospective method. Bancorp recognizes revenue upon satisfying a performance obligation as services are rendered to a customer. All of Bancorp’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The only impact to financial statement presentation was reclassification from expense to contra income costs incurred to obtain and fulfill contracts associated with investment product sales. All periods presented in these financial statements have been adjusted to reflect the reclassification. The table below presents ~~the Company’s~~Bancorp’s sources of non-interest income ~~for the three and six months ended June 30, 2018 and 2017. Items~~with items outside the scope of ASC 606 ~~are~~ noted as ~~such.~~such:

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

	Three months ended June 30, 2019						Three months ended June 30, 2018
(Dollars in thousands)	Commercial		WM&T		Total		Commercial		WM&T		Total
Wealth management and trust services	$	—	$	5,662	$	5,662	$	—	$	5,344	$	5,344
Deposit service charges		1,336		—		1,336		1,447		—		1,447
Debit and credit card income		2,168		—		2,168		1,689		—		1,689
Treasury management fees		1,202		—		1,202		1,113		—		1,113
Mortgage banking income(1)		796		—		796		746		—		746
Net investment product sales commissions and fees		364		—		364		397		—		397
Bank owned life insurance(1)		184		—		184		191		—		191
Other(2)		551		—		551		508		—		508
Total non-interest income	$	6,601	$	5,662	$	12,263	$	6,091	$	5,344	$	11,435

For the three months ended

For the six months ended

Revenue by operating segment

June 30, 2018

June 30, 2018

(In thousands)

Commercial

WM&T

Consolidated

Commercial

WM&T

Consolidated

Wealth management and trust services
$ - $ 5,344 $ 5,344 $ - $ 10,844 $ 10,844
Deposit service charges
1,447 1,447 2,858 2,858
Debit and credit card revenue
1,689 1,689 3,197 3,197
Treasury management fees
1,113 1,113 2,160 2,160
Mortgage banking revenue (1)
746 746 1,322 1,322
Investment product sales commissions and fees
397 397 801 801
Bank owned life insurance income (1)
191 191 378 378
Other income (2)
508 508 784 784
Total non-interest income
$ 6,091 $ 5,344 $ 11,435 $ 11,500 $ 10,844 $ 22,344

	Six months ended June 30, 2019						Six months ended June 30, 2018
(Dollars in thousands)	Commercial		WM&T		Total		Commercial		WM&T		Total
Wealth management and trust services	$	—	$	11,101	$	11,101	$	—	$	10,844	$	10,844
Deposit service charges		2,583		—		2,583		2,858		—		2,858
Debit and credit card income		3,912		—		3,912		3,197		—		3,197
Treasury management fees		2,359		—		2,359		2,160		—		2,160
Mortgage banking income(1)		1,278		—		1,278		1,322		—		1,322
Net investment product sales commissions and fees		720		—		720		801		—		801
Bank owned life insurance(1)		362		—		362		378		—		378
Other(2)		1,010		—		1,010		784		—		784
Total non-interest income	$	12,224	$	11,101	$	23,325	$	11,500	$	10,844	$	22,344

~~(1) Not within~~(1) Outside of the scope of ASC 606

~~(2) Includes safe box deposit fees of $46,000 quarterly and $91,000 year-to-date included within the scope of ASC 606~~

For the three months ended

For the six months ended

Revenue by operating segment

June 30, 2017

June 30, 2017

(In thousands)

Commercial

WM&T

Consolidated

Commercial

WM&T

Consolidated

Wealth management and trust services
$ - $ 5,153 $ 5,153 $ - $ 10,247 $ 10,247
Deposit service charges
1,516 1,516 3,015 3,015
Debit and credit card revenue
1,514 1,514 2,920 2,920
Treasury management fees
1,082 1,082 2,104 2,104
Mortgage banking revenue (1)
897 897 1,599 1,599
Investment product sales commissions and fees
357 357 743 743
Bank owned life insurance income (1)
556 556 760 760
Other income (2)
450 450 759 759
Total non-interest income
$ 6,372 $ 5,153 $ 11,525 $ 11,900 $ 10,247 $ 22,147

~~(1) Not within the scope of ASC 606~~

~~(2) Includes safe box deposit fees of $40,000 quarterly and $85,000 year-to-date included within the scope of ASC 606~~

Revenue sources within the scope of ASC 606 are discussed ~~below.~~below:

~~The Company~~Bancorp earns fees from its deposit customers for transactions-based, account management, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payments fees, and ACH fees, are recognized at the time the transaction is executed as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided. Overdraft fees are recognized at the point in time that the overdraft occurs. Deposit service charges are withdrawn from customer’s account balances.

Treasury management transaction fees are recognized at the time the transaction is executed as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided. Treasury management fees are withdrawn from customer’s account balances.

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

~~The Wealth Management and Trust Group~~WM&T provides customers fiduciary and investment management services as agreed upon in asset management contracts. The contracts require WM&T to provide a series of distinct services for which fees are earned over time. The contracts are cancellable upon demand with fees typically based upon the asset value of investments. Revenue is accrued and recognized monthly based upon month-end asset values and collected from the customer predominately in the following month except for a small percentage of fees collected quarterly. Incentive compensation related to WM&T activities is considered a cost of obtaining the contract. Contracts between WM&T and clients do not permit performance based fees and accordingly, none of the fees earned by WM&T are performance based. Trust fees receivable as of June 30, 2019 were $2.1 million compared with $1.9 million as of December 31, 2018.

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Investment products sales commissions and fees represent the Bank’s share of transaction fees and wrap fees resulting from investment services and programs provided through an agent relationship with a third party broker-dealer. Transaction fees are assessed at the time of the transaction. Those fees are collected and recognized on a monthly basis. Trailing fees are based upon market value and are assessed, collected, and recognized on a quarterly basis. ~~Variable costs considered costs of obtaining~~Because the ~~contracts related to~~Bank acts as an agent in arranging the relationship between the customer and third party provider, and does not control the services rendered, investment product sales ~~activities include~~commissions and fees are reported net of related costs, including nominal incentive compensation, ~~expense~~ and trading activity ~~charges. The incentive compensation has been reclassified from compensation expense~~charges of $257 and $261 thousand, for the ~~trading activity fees from technology~~ six month periods ended June 30, 2019, and ~~communication in prior years’ presentation to a reduction of income.~~2018 respectively.

Debit and credit card revenue primarily consists of debit and credit card interchange ~~revenue~~income. Interchange income represents fees assessed within the payment card system for acceptance of card based transactions. Interchange fees are assessed as the performance obligation is satisfied, which is at the point in time the card transaction is authorized. Revenue is collected and recognized daily through the payment network settlement process.

Bancorp did not establish any contract assets or liabilities as a result of adopting ASC 606, nor were any recognized during the firstsix ~~month period ending June 30, 2018. Trust fees receivable as~~ months of ~~June 30, 2018 were $2.2 million compared with $2.2 million as of December 31, 2017.~~2019.

Bancorp’s revenue on the consolidated statement of income is categorized by product type, which effectively depicts how the nature, timing, and extent of cash flows are affected by economic factors.

~~(21)~~(22)

~~Recently Adopted Accounting Pronouncements~~Leases

~~Accounting Standards Update (ASU) 2014-09,~~ ~~Revenue – Revenue~~Bancorp has operating leases for various branch locations with terms remaining from ~~Contracts~~3 months to 14 years, some of which include options to extend the leases in 5 year increments. Options reasonably expected to be exercised are included in determination of the right of use asset. Bancorp elected the practical expedient to expense short-term lease expense associated with ~~Customers~~.leases with original terms 12 months or less. Bancorp ~~adopted ASU 2014-09~~elected not to separate non-lease components from lease components for its operating leases. The right-of-use lease asset and all related amendments (ASC 606), which creates a single framework for recognizing revenue from contracts with customers that fall within its scope and revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancialoperating lease liability are recorded in others assets ~~effective January 1, 2018 using the full retrospective method. The great majority of Bancorp’s revenue consists of interest income generated by loans, leases, securities,~~ and other ~~investments, which is outside~~liabilities, respectively, on the scope of ASC 606. Significant judgements related to the nature and timing of revenue recognition were not impacted by implementing ASU 2014-09. Existing accrual practices for income earned but not collected proved consistent with the change in guidance to recognize revenue upon satisfying a performance obligation and as such no adjustment to retained earnings was needed. Services within the scope of ASC 606 include deposit service charges, WM&T revenue, investment product sales commissions and fees, interchange income, and the sale of other foreclosed assets. See note 20 for more revenue recognition details.

The only impact to financial statement presentation was reclassification from expense to contra income costs incurred to obtain and fulfill contracts associated with investment product sales. All periods presented in these financial statements have been adjusted to reflect the reclassification, the effect of which can be seen below.consolidated balance sheet.

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~~Stock Yards Bancorp, inc.~~Balance sheet, income statement, and ~~subsidiary~~cash flow detail regarding operating leases follows:

(In thousands)

Balance Sheet	June 30, 2019

Operating lease right-of-use assets	$	16,056		included in premises and equipment
Operating lease liabilities		17,373		included in other liabilities

Weighted average remaining lease term (in years)	12.42
Weighted average discount rate		3.61	%

Maturities of lease liabilities:
One year or less	$	1,949
Year 2		1,929
Year 3		1,919
Year 4		1,955
Year 5		1,935
Greater than 5 years		11,870
Total lease payments	$	21,557
Less imputed interest		4,184
Total	$	17,373

For the three months ended

For the three months ended

June 30, 2018

June 30, 2017

(In thousands)

As
reported

Under
legacy
GAAP

Impact of
ASC 606

As reported

Under
legacy
GAAP

Impact of
ASC 606

Non-interest income

Investment product sales commissions and fees
$ 397 $ 521 $ (124 ) $ 357 $ 494 $ (137 )

Non-interest expense

Compensation
11,703 11,704 (1 ) 10,566 10,567 (1 )
Technology and communication
2,264 2,387 (123 ) 2,120 2,256 (136 )

Net impact
$ - $ -

(In thousands)	Three months ended		Six months ended
Income Statement	June 30, 2019		June 30, 2019

Components of lease expense:
Operating lease cost	$	489	$	997
Variable lease cost		24		63
Less sublease income		13		27
Total lease cost	$	500	$	1,033

For the six months ended

For the six months ended

June 30, 2018

June 30, 2017

(In thousands)

As
reported

Under
legacy
GAAP

Impact of
ASC 606

As reported

Under
legacy
GAAP

Impact of
ASC 606

Non-interest income

Investment product sales commissions and fees
$ 801 $ 1,063 $ (262 ) $ 743 $ 1,033 $ (290 )

Non-interest expense

Compensation
22,673 22,674 (1 ) 21,235 21,237 (2 )
Technology and communication
4,460 4,721 (261 ) 3,968 4,256 (288 )

Net impact
$ - $ -

(In thousands)	Six months ended
Cash flow Statement	June 30, 2019

Supplemental cash flow information:
Operating cash flows from operating leases	$	694

~~ASU 2016-01,~~ ~~Financial Instruments – Overall: Recognition and Measurement~~As of ~~Financial Assets and Financial Liabilities~~. June 30, 2019 Bancorp ~~adopted ASU 2016-01 effective January 1, 2018. The most significant impact~~had not entered into any lease agreements that had yet to Bancorp was a change in valuation methods for the loan portfolio for fair value reporting. GAAP no longer allows for valuing financial instruments for fair value purposes using an “entrance” pricing methodology. The use of an “exit” price methodology requires greater assumptions regarding life of loan losses and is a more complex calculation, the results of which are documented in note 16.

~~ASU 2018-02,~~ ~~Income Statement Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~. Bancorp adopted ASU 2018-02 in the first quarter of 2018. Stranded items in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017 totaling $506 thousand were reclassified into retained earnings.commence.

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~~Stock Yards Bancorp, inc. and subsidiary~~

~~(22)~~

~~Recently Issued Accounting Pronouncements~~

~~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 standard 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 has evaluated existing lease commitments and expects to record a right-of-use asset and lease liability of approximately $11 million upon adoption. Bancorp’s financial condition and results of operations are not otherwise expected to be impacted.

~~In June 2016, FASB issued ASU 2016-13,~~ ~~Measurement of Credit Losses on Financial Instruments~~, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. This standard will likely have a significant impact on the way Bancorp recognizes credit impairment on loans. Under current US GAAP, credit impairment losses are determined using an incurred-loss model, which recognizes credit losses only when it is probable that all contractual cash flows will not be collected. The initial recognition of loss under CECL differs from current US GAAP because recognition of credit losses will not be based on any triggering event. This should generally result in credit impairment being recognized earlier and immediately after the financial asset is originated or purchased. Bancorp continues to evaluate existing accounting processes, internal controls, and technology capabilities to determine what additional changes will be needed to address the new requirements. These processes and controls require significant judgment, collection and analysis of additional data, and use of estimates. Technology and other resources have been upgraded or modified to capture additional data to support the accounting and disclosure requirements. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2019. While the impact of implementing the CECL model cannot be quantified at this time, Bancorp expects to recognize a one-time cumulative-effect adjustment to the allowance in the first quarter of 2020, consistent with interagency guidance issued in 2016.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,~~ which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The changes are effective for public business entities that are SEC filers, for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.

~~In August 2017, the FASB issued ASU 2017-12,~~ ~~Derivatives and Hedging (Topic 815); Targeted Improvements for Accounting for Hedging Activities~~, which amends the hedge accounting recognition and presentation requirements under ASC 815. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption of this standard is permitted upon its issuance. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.

~~In February 2018, FASB issued ASU 2018-03,~~ ~~Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10):Recognition and Measurement of Financial Assets and Financial Liabilities~~, which makes technical corrections to certain aspects of ASU 2016-01 regarding recognition of financial assets and liabilities. Transition guidance is provided for equity securities without a readily determinable fair value. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal periods. Public business entities with fiscal years beginning between December 15, 2017 and June 15, 2018, are not required to adopt the amendments until the interim period beginning after June 15, 2018. Bancorp does not expect adoption of this standard to have a significant impact on the consolidated financial statements of the Company.

~~In June 2018, FASB issued ASU 2018-07,~~ ~~Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting~~, which expands the scope of topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Consistent with the accounting for employee share-based payment awards, nonemployee share-based payment awards will be measured at grant-date fair value of the equity instruments obligated to be issued when the good has been delivered or the service rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. This ASU is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. Bancorp does not expect adoption of this standard to have a significant impacted on the consolidated financial statements of the company.

~~Table of Contents~~

~~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 ofand operations for Stock Yards Bancorp, Inc. (“~~Bancorp” or “Company”~~Holding Company”), and its wholly-owned subsidiary, Stock Yards Bank & Trust Company (“Bank”) for the three and six months ended June 30, ~~2018~~2019 and compares these periods with the same periods of the previous year. ~~Unless otherwise indicated, all references~~All significant inter-company transactions and accounts have been eliminated in ~~this discussion~~consolidation. All companies are collectively referred to as “Bancorp” or the ~~Bank include Bancorp. In addition,~~“Company.”

As a result of its acquisition of King, Bancorp, Inc. on May 1, 2019, Bancorp became the ~~discussion describes changes in~~100% successor owner of King Bancorp Statutory Trust I (“KBST”), an unconsolidated finance subsidiary. As permitted under the ~~financial condition~~terms of KBST’s governing documents, Bancorp redeemed the trust-preferred securities at the par amount of approximately $3.6 million on June 17, 2019.

Management’s Discussion and ~~the Bank that have occurred during the first six months~~Analysis of ~~2018 compared with the same period in 2017. This discussion~~Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying notes presented in Part 1 Item 1 ~~of this report.~~“Financial Statements.”

Stock Yards Bancorp, Inc. is a financial holding company headquartered in Louisville, Kentucky.

The Bank, chartered in 1904, is a state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio Metropolitan Statistical Areas (“MSAs”) through 43 full service banking center locations.

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.

Acquisition of King Bancorp, Inc.and its wholly-owned subsidiary King Southern Bank(“King”)

On May 1, 2019, Bancorp completed its acquisition of King Bancorp Inc., and its wholly-owned subsidiary King Southern Bank (collectively referred to as “King”), for $28 million in cash. The acquisition expands the Company’s market area into nearby Nelson County, Kentucky, while expanding the customer base in Louisville, Kentucky. At May 1, 2019, King reported approximately $192 million in total assets, approximately $164 million in loans, and approximately $126 million in deposits.

As a result of the completion of the acquisition, Bancorp incurred pre-tax transaction charges totaling $1.3 million for the three and six months ended June 30, 2019. Net income from the King acquisition is expected to be accretive to Bancorp’s overall operating results on a quarterly basis going forward.

Issued but Not Yet Effective Accounting Standards Updates (“ASUs”)

For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see Footnote 1 “Basis of Presentation and Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”

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Business Segment Overview

As of June 30, 2019, Bancorp was divided into two reportable segments: Commercial Banking and Wealth Management & Trust (“WM&T”):

WM&T, with over $3 billion in assets under management (“AUM”), provides custom-tailored financial planning, investment management, retirement planning and trust and estate services in all markets in which Bancorp operates.

Summary - Three and Six Months Ended June 30, 2019 Compared to the Three and Six Months Ended June 30, 2018

Three months ended June 30, (In thousands, except per share data)	2019			2018			$ Change		% Change

Net income	$	16,543		$	13,579		$	2,964		21.8	%
Diluted earnings per share	$	0.72		$	0.59		$	0.13		22.0	%
Annualized return on average assets		1.93	%		1.74	%	19 bps			10.9	%
Annualized return on average equity		17.40	%		15.94	%	146 bps			9.2	%

Six months ended June 30, (In thousands, except per share data)	2019			2018			$ Change		% Change

Net income	$	32,184		$	26,983		$	5,201		19.3	%
Diluted earnings per share	$	1.40		$	1.17		$	0.23		19.7	%
Annualized return on average assets		1.93	%		1.75	%	18 bps			10.3	%
Annualized return on average equity		17.25	%		16.05	%	120 bps			7.5	%

Overview of ~~2018 through~~six months ended June 30, 2019 compared with same period in 2018

Bancorp completed the first six months of ~~2018~~2019 with record net income of ~~$27.0~~$32.2 million, a ~~26.1%~~19.3% increase over the comparable period in ~~2017.~~2018. The increase is primarily due to higher net interest income driven by ~~exceptional~~year-over-year average loan growth, higher non-interest income led by WM&T and ~~higher interest rates,~~debit and credit card income, and a lower effective income tax rate resulting from Kentucky tax ~~reform.~~law changes. Diluted earnings per share for the first six months of ~~2018~~2019 were ~~$1.17,~~$1.40, compared ~~with $0.93~~to $1.17 for the first six months of ~~2017. Bancorp's performance~~2018.

Key factors affecting Bancorp’s results for the ~~first~~ six months ~~of 2018 reflected several positive factors, including:~~ended June 30, 2019 included:

●

~~Exceptional~~Average loans increased $115.4 million, or 4.7%, year over year as a result of strong loan production and the May 1, 2019 King acquisition, contributing to a 16.6% increase in interest income. Total average deposits increased 9.8% to support loan growth, ~~which increased~~reflecting strong growth in time deposits and the ~~Company’s loan portfolio 7% on a year-to-date basis and 12% year over year;~~impact of the King acquisition;

●

~~A higher net~~Net interest ~~margin, reflecting both~~income increased ~~rate and volume;~~$4.4 million or 7.9% for the six months ended June 30, 2019, due largely to a $8.4 million increase in interest income earned on loans;

●

~~A continuation~~Net interest margin rose 1 basis point compared with the same period of ~~historically strong credit quality metrics;~~2018 as interest income stemming from asset growth offset increased interest expense resulting from deposit rate increases;

●

~~Another solid performance by~~Credit quality metrics remained sound, including net loan loss recoveries for the ~~Wealth Management~~first six months of 2019, leading to reduced provision for loan and ~~Trust Group; and~~lease losses (“provision”) of $600 thousand, as compared with $2.0 million for the comparable 2018 period;

●

~~The benefit of~~WM&T, buoyed by a ~~lower marginal tax rate.~~strong second quarter market and new business generation, achieved 2.4% revenue growth year over year;

Table of Contents

As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income 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. New business volume is influenced by economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace.

●	Card income and treasury management fees, bolstered by increased volume and usage, continued to stand out as diversifying non-interest revenue streams; and

●	Bancorp’s effective income tax rate declined to 8.2% for the six months ended June 30, 2019 based on changes made to Kentucky state tax law during the first and second quarters of 2019.

Net interest income increased ~~$5.5~~$4.4 million, or ~~11.0%~~7.9%, for the first six months of ~~2018,~~2019, as compared with the same period in ~~2017.~~2018. Net interest margin increased to 3.85% for the first six months of 2019, compared with 3.84% for the same period of 2018. Increasing average rates earned on interest earning assets, along with the impact of increased ~~loan balances~~volumes of loans and short-term investments contributed to higher interest income for the first six months of ~~2018,~~2019, as interest income increased ~~$8.1~~$10.2 million, or ~~15.0%~~16.6%, over the same period in ~~2017.~~2018. Average earning asset growth attributable to the May 1, 2019 King acquisition totaled $56 million for the six-month comparison period. Higher ~~funding~~long-term borrowing costs onassumed in the King acquisition, along with a shift in deposits ~~and borrowings~~from non-interest bearing accounts to interest bearing accounts resulted in an increase in interest expense of ~~$2.5~~$5.8 million. Interest paying liabilities assumed as part of the King acquisition contributed $47.1 million of the total $149.6 million average interest bearing liabilities growth for the six month comparison. The average balance of time deposits increased $144.8 million, or ~~78.5%, year over year. Bancorp benefited~~61.2% in ~~recent years~~the first six months of 2019, as compared with the same period in 2018, as a result primarily of targeted marketing campaigns initiated in 2018 to support loan growth and add liquidity to the balance sheet. The corresponding cost of time deposits increased from ~~historically low costs of funding, so that a modest increase in interest expense results in a significant percentage change over prior periods. Net interest margin increased to 3.84%~~0.86% for the first six months of 2018 ~~compared with 3.62%~~to 1.93% for the same period ~~of 2017.~~

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

in 2019.

For the six-month period ended June 30, ~~2018,~~2019, Bancorp recorded a ~~$2.0 million~~$600 thousand provision, ~~for loan losses,~~ compared with ~~$1.5~~$2.0 million for the same period in ~~2017. Key loan quality indicators remained consistent with prior periods.~~2018. The provision ~~for loan losses~~ represents a charge to earnings necessary to maintain an allowance ~~for loan losses~~ that, in management’s ~~evaluation,~~estimation, is adequate to provide coverage for the inherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors. Reflecting continued strong credit quality metrics, and net recoveries of $282 thousand in the first six months of 2019, the allowance ~~for loan losses~~ to total loans was 0.96% as of June 30, ~~2018,~~2019, compared with ~~1.09%~~0.96% as of June 30, ~~2017. The decline in allowance for loan losses was largely~~2018. In management’s opinion, the ~~effect of loan growth in the first six months of 2018 and charge offs that had been previously reserved. The~~ allowance remained adequate to cover potential losses inwithin the ~~portfolio, in management’s opinion.~~portfolio.

Total non-interest income infor the first six months of ~~2018~~2019 increased ~~$197~~$981 thousand, or ~~0.9%~~4.4%, compared with the same period in ~~2017, and~~2018. Non-interest income comprised ~~28.5%~~27.9% of total revenues, defined as net interest income and non-interest income, as compared with ~~30.5%~~28.5% for the same period in ~~2017. Continuing~~2018. Bancorp’s WM&T services comprised 47.6% of Bancorp’s non-interest income. Debit and credit card revenue, as a result of increasing transaction volumes and incentives paid by the ~~trends~~credit card processor, increased $715 thousand, or 22.4% in the first six months of ~~2017, Bancorp’s Wealth Management and Trust Group led the increase~~2019, as compared with ~~a 5.8%, or $597 thousand increase over~~ the same period in ~~2017. This growth, which reflected~~2018. Treasury management fees, a steadily growing source of revenue for Bancorp, increased $199 thousand, or 9.2%, in the ~~addition~~first half of ~~new customer relationships~~2019, as compared with the first half of 2018. These items offset declines of $275 thousand, and ~~stock market performance, is expected to continue at 4%-6%~~$81 thousand, for deposit service charges and investment product sales commissions and fees, respectively, for the first six months of 2019, as compared with 2018.

Total non-interest expense in the first six months of ~~2018~~2019 increased ~~$959 thousand~~$4.9 million, or ~~2.3%~~11.4%, compared with the same period in ~~2017.~~2018. Increases in compensation, technology and communication, legal and ~~marketing~~professional fees, and ~~business development~~other expenses drove the increase. Costs associated with the King acquisition recognized during 2019 totaled $1.3 million approximately, or $0.05 net income per diluted share, and were ~~partially offset by a reduction in amortization/impairment of investment in tax credit partnerships due to the sporadic timing of such opportunities, which can cause corresponding expenses~~spread primarily between compensation and ~~tax benefits to vary widely.~~legal and professional fees. Bancorp's efficiency ratio, ~~calculated on a fully tax-equivalent basis,~~reflecting the one-time transaction costs associated with the King acquisition recognized in the first six months of ~~2018~~2019 was ~~55.0%~~57.36%, as compared with ~~57.8%~~54.98% in the same period in ~~2017. Excluding amortization~~2018.

Bancorp recorded income tax expense of ~~the investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 54.9%~~$2.9 million for the first six months of ~~2018 and 56.1%~~2019, compared to $6.2 million for the same period in ~~2017. See~~2018. The effective rate for the ~~Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures.~~

~~Bancorp’s effective tax rate decreased to~~corresponding six month periods was 8.2% and 18.7% ~~in 2018 from 26.0% in 2017.~~, respectively. The decrease in the effective tax rate from ~~2017~~2018 to ~~2018 was largely the result~~2019 related primarily to Kentucky state tax law changes as discussed below:

●

In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Historically, the franchise tax, a component of non-interest expenses, was assessed at 1.1% of net capital and averaged $2.5 million annually over the prior two year-end periods. The Kentucky corporate income tax will be assessed at 5% of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, during the first quarter of 2019, Bancorp established a Kentucky state deferred tax asset related to existing temporary differences estimated to reverse after the effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of federal impact of $1.3 million, or approximately $0.06 per diluted share for the first six months of 2019. While this is positive in the short-term, Bancorp anticipates an unfavorable impact of approximately $200 thousand per year beginning in 2021.

Table of the reduction of the federal tax rate from 35% to 21% effective January 1, 2018, as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017. The 2017 effective tax rate included significantly more tax savings from stock-based compensation deductions and federal income tax credits.Contents

●

In April 2019, the Kentucky legislature passed HB458 allowing banks and their holding companies to be combined together for Kentucky tax return filings beginning in 2021. The combined filing will allow Bancorp’s Holding Company net operating losses to offset against net revenue generated by The Bank and reduce Bancorp’s tax liability. Bancorp recorded a state tax benefit associated with this change of $2.4 million in the second quarter of 2019, or approximately $0.11 per diluted share for the first six months of 2019.

The ratio of ~~shareholder’s~~stockholder’s equity to total assets was ~~10.40%~~11.24% as of June 30, ~~2018~~2019, as compared with ~~10.30%~~11.10% at December 31, ~~2017. Tangible~~2018, and 10.40% at June 30, 2018. Total equity increased $22.9 million in the first six months of 2019, as net income of $32.2 million was offset by dividends declared of $11.6 million and stock repurchases totaling $5.8 million. Bancorp’s ratio of tangible common equity ~~(TCE)~~(“TCE”) to total tangible assets was 10.85% as of June 30, 2019, compared with 11.05% at December 31, 2018, and 10.35% at June 30, 2018, with the decline attributable to the KSB acquisition. TCE, (a non-U.S. Generally Accepted Accounting Principle (“GAAP”) measure), ~~a non-GAAP measure,~~ is a measure of a company's capital which is useful in evaluating the quality and adequacy of capital. See the Non-GAAP Financial Measures section for details on reconcilement to US GAAP measures. ~~The ratio of tangible common equity to total tangible assets was 10.35% as of June 30, 2018, compared with 10.25% at December 31, 2017.~~

~~The following sections provide more details on subjects presented in this overview.~~Results of Operations

~~Table of Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

a)	~~Results Of Operations~~

��

Net income of ~~$13.6~~$16.5 million for the three months ended June 30, ~~2018~~2019 increased $3.0 million, or ~~28.1%~~21.8%, from ~~$10.6~~$13.6 million for the comparable ~~2017~~2018 period. Basic net income per share was $0.73 for the second quarter of 2019, an increase of 21.7% from the $0.60 for the second quarter of ~~2018, an increase of 27.7% from the $0.47 for the same period of 2017.~~2018. Net income per share on a diluted basis was ~~$0.59~~$0.72 for the ~~three month period ended June 30, 2018,~~second quarter of 2019, an increase of ~~28.3%~~22.0% from the ~~$0.46~~$0.59 for the same period in ~~2017.~~2018. See Note 1112 for additional information related to net income per share.

Annualized return on average assets and annualized return on average stockholders’ equity were ~~1.74%~~1.93% and ~~15.94%~~17.40%, respectively, for the second quarter of ~~2018,~~2019, compared with ~~1.42%~~1.74% and ~~13.12%~~15.94%, respectively, for the same period in ~~2017.~~2018.

Net income of ~~$27.0~~$32.2 million for the six months ended June 30, ~~2018~~2019 increased ~~$5.6~~$5.2 million, or ~~26.1%~~19.3%, from ~~$21.4~~$27.0 million for the comparable ~~2017~~2018 period. Basic net income per share was ~~$1.19~~$1.42 for the first six months of ~~2018,~~2019, an increase of ~~25.3%~~19.3% from ~~$0.95~~the $1.19 for the same period of ~~2017.~~2018. Net income per share on a diluted basis was ~~$1.17~~$1.40 for the ~~six month period ended June 30, 2018,~~first half of 2019, an increase of ~~25.8%~~19.7% from ~~0.93~~the $1.17 for the same period in ~~2017.~~2018. See Note 1112 for additional information related to net income per share.

Annualized return on average assets and annualized return on average stockholders’ equity were ~~1.75%~~1.93% and ~~16.05%~~17.25%, respectively, for the six months ended June 30, ~~2018,~~2019, compared with ~~1.44%~~1.75% and ~~13.45%~~16.05%, respectively, for the same period in ~~2017.~~

2018.

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~~Stock Yards Bancorp, inc. and subsidiary~~

Net Interest Income

The following tables present average balance sheets for the three and six month periods ended June 30, ~~2018~~2019 and ~~2017~~2018 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.

Average Balances and Interest Rates - Taxable Equivalent Basis
	Three months ended June 30,														Three months ended June 30,
	2018							2017							2019							2018
	Average				Average			Average				Average			Average				Average			Average				Average
(Dollars in thousands)	balances		Interest		rate			balances		Interest		rate			balances		Interest		rate			balances		Interest		rate

Earning assets:
Federal funds sold and interest bearing deposits	$	36,985	$	163		1.77	%	$	105,786	$	276		1.05	%
Federal funds sold and interest bearing due from banks															$	137,130	$	830		2.43	%	$	36,985	$	163		1.77	%
Mortgage loans held for sale		2,975		44		5.93			4,505		53		4.72			3,794		43		4.55			2,975		44		5.93
Securities:
Securities available for sale:
Taxable		358,637		1,996		2.23			400,935		1,982		1.98			410,201		2,395		2.34			358,637		1,996		2.23
Tax-exempt		42,732		288		2.70			53,899		396		2.95			25,190		162		2.58			42,732		288		2.70
FHLB stock and other securities		8,925		109		4.90			6,376		74		4.66
FHLB stock																10,590		151		5.72			8,925		109		4.90
Loans, net of unearned income		2,523,450		29,489		4.69			2,258,710		24,447		4.34			2,658,036		33,442		5.05			2,523,450		29,489		4.69

Total earning assets		2,973,704		32,089		4.33			2,830,211		27,228		3.86			3,244,941		37,023		4.58			2,973,704		32,089		4.33

Less allowance for loan losses		24,433							24,849							27,190							24,433
		2,949,271							2,805,362							3,217,751							2,949,271
Non-earning assets:
Cash and due from banks		40,607							39,989							43,955							40,607
Premises and equipment		42,000							41,754
Premises and equipment, net																64,238							42,000
Accrued interest receivable and other assets		100,616							107,104							110,231							100,616

Total assets	$	3,132,494						$	2,994,209						$	3,436,175						$	3,132,494

Interest bearing liabilities:
Deposits:
Interest bearing demand deposits	$	792,193	$	839		0.42	%	$	736,896	$	391		0.21	%	$	843,768	$	1,408		0.67	%	$	792,193	$	839		0.42	%
Savings deposits		158,561		61		0.15			148,824		54		0.15			169,883		109		0.26			158,561		61		0.15
Money market deposits		657,230		1,206		0.74			688,237		683		0.40			689,954		2,079		1.21			657,230		1,206		0.74
Time deposits		238,746		568		0.95			238,333		353		0.59			409,163		2,056		2.02			238,746		568		0.95
Total interest bearing deposits																2,112,768		5,652		1.07			1,846,730		2,674		0.58
Securities sold under agreements to repurchase		61,993		33		0.21			60,336		32		0.21			39,969		28		0.28			61,993		33		0.21
Federal funds purchased and other short term borrowings		88,180		394		1.79			18,451		29		0.63			11,774		64		2.18			88,180		394		1.79
FHLB advances		48,929		229		1.88			50,543		239		1.90			72,923		424		2.33			48,929		229		1.88
Subordinated debt																1,497		26		6.97			—		—		—


Total interest bearing liabilities		2,045,832		3,330		0.65			1,941,620		1,781		0.37			2,238,931		6,194		1.11			2,045,832		3,330		0.65

Non-interest bearing liabilities:
Non-interest bearing demand deposits		701,642							683,966							754,592							701,642
Accrued interest payable and other liabilities		43,383							44,609							61,382							43,383
Total liabilities		2,790,857							2,670,195							3,054,905							2,790,857

Stockholders’ equity		341,637							324,014							381,270							341,637
Total liabilities and stockholders’ equity	$	3,132,494						$	2,994,209

Total liabilities and stockholder's equity															$	3,436,175						$	3,132,494
Net interest income			$	28,759						$	25,447						$	30,829						$	28,759
Net interest spread						3.68	%						3.49	%						3.47	%						3.68	%
Net interest margin						3.88	%						3.60	%						3.81	%						3.88	%

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~~Stock Yards Bancorp, inc. and subsidiary~~

~~Average Balances and Interest Rates - Taxable Equivalent Basis~~

	Six months ended June 30,															Six months ended June 30,
	2018								2017							2019							2018
	Average					Average			Average				Average			Average				Average			Average				Average
(Dollars in thousands)	balances			Interest		rate			balances		Interest		rate			balances		Interest		rate			balances		Interest		rate

Earning assets:
Federal funds sold and interest bearing deposits	$	53,991		$	431		1.61	%	$	85,657	$	410		0.97	%
Federal funds sold and interest bearing due from banks																$	129,701	$	1,563		2.43	%	$	53,991	$	431		1.61	%
Mortgage loans held for sale		2,539			79		6.27			3,729		97		5.25			2,766		80		5.83			2,539		79		6.27
Securities:
Securities available for sale:
Taxable		365,935			4,024		2.22			416,022		4,024		1.95			410,018		4,806		2.36			365,935		4,024		2.22
Tax-exempt		43,558			583		2.70			54,413		798		2.96			26,480		337		2.57			43,558		583		2.70
FHLB stock and other securities		8,310			219		5.31			6,361		146		4.63
FHLB stock																	10,392		308		5.98			8,310		219		5.31
Loans, net of unearned income		2,478,305			56,590		4.60			2,268,146		48,606		4.32			2,593,712		65,014		5.05			2,478,305		56,590		4.60

Total earning assets		2,952,638			61,926		4.23			2,834,328		54,081		3.85			3,173,069		72,108		4.58			2,952,638		61,926		4.23

Less allowance for loan losses		24,746								24,615							26,662							24,746
		2,927,892								2,809,713							3,146,407							2,927,892
Non-earning assets:
Cash and due from banks		40,298								40,037							42,810							40,298
Premises and equipment		41,945								42,003
Premises and equipment, net																	63,083							41,945
Accrued interest receivable and other assets		101,672								104,814							101,872							101,672

Total assets	$	3,111,807							$	2,996,567						$	3,354,172						$	3,111,807

Interest bearing liabilities:
Deposits:
Interest bearing demand deposits	$	804,810		$	1,462		0.37	%	$	746,144	$	658		0.18	%	$	852,347	$	2,811		0.67	%	$	804,810	$	1,462		0.37	%
Savings deposits		156,594			117		0.15			146,016		68		0.09			163,504		205		0.25			156,594		117		0.15
Money market deposits		671,883			2,159		0.65			694,636		1,227		0.36			683,767		4,054		1.20			671,883		2,159		0.65
Time deposits		236,577			1,013		0.86			242,543		691		0.57			381,358		3,648		1.93			236,577		1,013		0.86
Total interest bearing deposits																	2,080,976		10,718		1.04			1,869,864		4,751		0.51
Securities sold under agreements to repurchase		66,609			67		0.20			64,379		67		0.21			38,755		53		0.28			66,609		67		0.20
Federal funds purchased and other short term borrowings		57,391			483		1.70			17,046		48		0.57			11,602		124		2.16			57,391		483		1.70
FHLB advances		49,087			464		1.91			50,704		471		1.87			60,512		645		2.15			49,087		464		1.91
Subordinated debt																	752		26		6.97			—		—		—


Total interest bearing liabilities		2,042,951			5,765		0.57			1,961,468		3,230		0.33			2,192,597		11,566		1.06			2,042,951		5,765		0.57

Non-interest bearing liabilities:
Non-interest bearing demand deposits		685,873								672,199							724,896							685,873
Accrued interest payable and other liabilities		43,866								42,034							60,481							43,866
Total liabilities		2,772,690								2,675,701							2,977,974							2,772,690

Stockholders’ equity		339,117	��							320,866							376,198							339,117
Total liabilities and stockholders’ equity	$	3,111,807							$	2,996,567

Total liabilities and stockholder's equity																$	3,354,172						$	3,111,807
Net interest income				$	56,161						$	50,851						$	60,542						$	56,161
Net interest spread							3.66	%						3.52	%						3.52	%						3.66	%
Net interest margin							3.84	%						3.62	%						3.85	%						3.84	%

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~~Stock Yards Bancorp, inc. and subsidiary~~

Notes to the average balance and interest rate tables:

●

~~Net interest income,~~Average balances for loans include the ~~most significant component~~principal balance of non-accrual loans, as well as all loan premiums, discounts, fees and costs, and exclude participation loans accounted for as secured borrowings. Participation loans averaged $10.0 million and $17.1 million, respectively, for the ~~Bank's earnings is total interest income less total interest expense. The level of net interest income is determined by mix~~three month periods ended June 30, 2019 and ~~volume of interest earning assets, interest bearing deposits~~2018, and ~~borrowed funds,~~$10.2 million and ~~changes in interest rates.~~$17.6 million, respectively for the six month periods ended June 30, 2019 and 2018.

●

~~Net interest spread is the difference between taxable equivalent rates 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 additional amounts 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 tax-exempt loans has been calculated on a fully tax equivalent basis using a federal income tax rate of 21% for ~~2018~~2019 and ~~35% for 2017.~~2018. Approximate tax equivalent adjustments to interest income were ~~$85~~$55 thousand and ~~$203~~$85 thousand, respectively, for the three month periods ended June 30, 2019 and 2018, and ~~2017,~~$111 thousand and $178 thousand ~~and $400 thousand~~ for the respective six month periods ended June 30, ~~2018~~2019 and ~~2017.~~2018.

●

~~Average balances for loans include the principal balance~~Interest income includes loan fees of ~~non-accrual loans~~$295 thousand and ~~exclude participation loans accounted for as secured borrowings. These participation loans averaged $17.1 million and $21.4 million, respectively,~~$297 thousand for the three ~~month periods~~months ended June 30, 2019, and 2018, respectively, and ~~2017~~$776 thousand and ~~$17.6 million and $18.7 million, respectively,~~$514 thousand for the respective six month periods ended June 30, ~~2018~~2019 and ~~2017.~~2018.

●

Net interest income, the most significant component of the Bank's earnings represents 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 taxable equivalent rates earned on interest earning assets less the cost of 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 impacted by both interest rate spread and the level of non-interest bearing sources of funds, primarily consisting of demand deposits and stockholders’ equity.

Net interest spread and net interest margin were 3.47% and 3.81%, respectively, for the second quarter of 2019, and 3.68% and 3.88%, respectively, for the second quarter of 2018. Net interest margin was challenged in the second quarter of 2019 primarily due to the following:

●

While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, it has become more rate sensitive as deposit balances have migrated from non-interest bearing accounts to interest bearing accounts.

●

Asset yields were impacted by the downward trending of the overall rate environment, as fixed rate loan pricing and LIBOR based loans were impacted.

●

The second quarter 2018 margin was elevated by prepayment fees collected, with a much lighter impact experienced in the second quarter of 2019.

●

The King portfolio mix of earning assets and interest bearing liabilities had a slightly negative impact on margin overall.

Fully taxable equivalent net interest income of ~~$28.8~~$30.8 million for the three months ended June ~~2018~~30, 2019 increased ~~$3.3~~$2.1 million, or ~~13.1%~~7.2%, from ~~$25.4~~$28.8 million for the same period in ~~2017. Positive effects of~~2018. Fully taxable equivalent interest income increased average balances on loans, resulting from strong loan growth year over year, and increased interest rates on loans and investments were partially offset by the negative effect of increasing rates on deposit accounts and other funding sources. Net interest spread and net interest margin were 3.68% and 3.88%, respectively,$4.9 million or 15.4% for the second quarter of 2019, as compared with the second quarter of 2018, due primarily to increased average loan balances stemming from loan growth fueled by record loan production and ~~3.49%~~the King acquisition, as well as increased rates earned on loans. Wall Street Journal Prime interest rate was 50 to 75 basis points (“bps”) higher for much of the first half of 2019, as compared with 2018, which benefited short-term loan and ~~3.60%~~investment pricing. Taxable securities, and federal funds sold and interest bearing due from banks average balances also increased in the first half of 2019, as compared with 2018, as a result of Bancorp deploying excess liquidity into short-term investments, which earned higher yields year over year. In total, average earning assets increased $271.2 million or 9.1% to $3.2 billion for the three month period ended June 30, 2019, as compared with the same period in 2018, with the average rate on earnings assets increasing 25 bps to 4.58%. Earning assets resulting from the King acquisition averaged $119.6 million, and yielded 5.28% for the three months ended June 30, 2019.

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Interest expense increased due primarily to rising deposit costs, growth in interest bearing demand deposits and time deposits, and deposits assumed in the King acquisition. While the Company has not aggressively pursued deposits since mid-2018, nor has it significantly raised rates, deposit balances migrated from non-interest bearing accounts to interest bearing accounts during the period. Average interest bearing liabilities increased $193.0 million, or 9.4%, ~~respectively,~~to $2.2 billion for the three month period ended June 30, 2019, as compared with the same period in 2018. Average interest bearing liabilities resulting from the King acquisition totaled $93.8 million in the second quarter. Growth in average interest bearing deposits was partially offset by declines in securities sold under agreements to repurchase (“SSUARs”). The average cost of interest bearing liabilities increased 46 bps to 1.11% for the second quarter of ~~2017. Interest expense remained under rate pressure due~~2019, as compared with the second quarter of 2018. Bancorp increased rates paid on money market accounts in the first half of 2018 in addition to ~~rising~~launching a marketing campaign promoting certificate of deposit ~~costs~~accounts. Costs of money market deposit accounts and time deposits increased ~~utilization~~47 bps, and 107 bps, respectively, in the second quarter of ~~short-term borrowings for liquidity purposes. Management expects deposit rate pressure to continue to increase over~~2019, as compared with the same period in 2018. The average balance of ~~2018. Depositors are becoming more rate sensitive, competition is increasing, and Bancorp intends~~securities sold under agreements to ~~grow its deposit base~~repurchase (“SSUARs”) decreased $22.0 million, or 35.5%, as customers migrated from lower yielding collateralized products to ~~support loan growth. Raising deposits more aggressively than that of our normal account acquisition strategies will require paying~~ higher ~~rates for deposits. Given these circumstances positive effects of prime rate increases on loans could be offset by higher costs of~~yielding non-collateralized deposits.

Fully taxable equivalent net interest income of ~~$56.2~~$60.5 million for the six months ended June 30, ~~2018~~2019 increased ~~$5.3~~$4.4 million, or ~~10.5%~~7.8%, from ~~$50.8~~$56.2 million for the same period in ~~2017.~~2018. Positive effects of increased average balances on loans, resulting primarily from strong second quarter loan growth coupled with loans added in ~~2018,~~the King acquisition, and increased balances and rates on other earning assets, were partially offset by the negative effect of increasing rates ~~and average balances~~ for all funding sources. Interest earning assets and interest bearing liabilities increased $220.4 million, or 7.5%, and $149.6 million, or 7.3%, respectively, for the six month periods ended June 30, 2019 and June 30, 2018. Net interest spread and net interest margin were 3.52% and 3.85%, respectively, for the first six months of 2019 and 3.66% and 3.84%, respectively, for the first six months of ~~2018 and 3.52% and 3.62%, respectively, for the first six months of 2017.~~

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~~Stock Yards Bancorp, inc. and subsidiary~~2018.

Going forward, yield curve inversion could pose a significant challenge if loans were to be originated and repriced at a relatively low five-year portion of the treasury yield curve, while deposits and other funding sources priced or re-priced based upon a higher short end of the curve.

~~Average earning assets increased $143.4 million or 5.1%, to $2.97 billion for~~

The Federal Reserve Bank (“FRB”) reduced the ~~three month period ended June 30, as compared~~federal funds rate 25 bps in late July, with the ~~same period~~prime lending rate experiencing a corresponding 25 bps decrease. Bancorp’s strategy in ~~2017, reflecting increases~~response to the rate reduction is to reduce deposit rates in order to fully offset the ~~loan portfolio partially~~loss in revenue. Future rate decreases could have a negative impact on net interest margin, as additional reductions in deposit rates may not be sufficient to offset ~~by decreases~~the potential loss in federal funds sold and available-for-sale investments. Average interest bearing liabilities increased $104.2 million, or 5.4%, to $2.0 billion for the second quarter of 2018, as compared with the same period in 2017, primarily due to increases in the volume of interest bearing demand deposits, savings deposits, and federal funds purchased and other short term borrowings, partially offset by decreases in money market deposits. Average earning assets increased $118.3 million or 4.2%, to $2.95 billion for the first six months of 2018 as compared with 2017, reflecting increases in the loan portfolio partially offset by decreases in federal funds sold and available for sale securities. Average interest bearing liabilities increased $81.5 million, or 4.2%, to $2.0 billion for the first six months of 2018, as compared with the same period in 2017. Increases in the volume of interest bearing demand deposits, savings deposits, and federal funds purchased and other short term borrowings were partially offset by decreases in volume of money markets deposits and time deposits.revenue.

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 with the goal of optimizing 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 dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate ~~increases and decreases,~~fluctuations, the model can ~~reveal~~ approximate interest rate risk exposure. This 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 may not indicate actual or expected results.

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The June 30, ~~2018~~2019 simulation analysis, which shows minimal interest rate sensitivity, indicates that increases in interest rates of 100 to 200 basis points would have a positive effect on net interest income, and decreases of 100 to 200 basis points in interest rates would have a negative effect on net interest income. ~~If rates rise 200 bps, net interest income increases 2.11%.~~ The ~~relatively small~~mix of assets and liabilities acquired in the King transaction slightly increased Bancorp’s exposure to falling rates. The overall minimal increase in net interest income ~~for~~in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing more quickly than deposits and short-term borrowings. Asset balances subject to immediate repricing cause an estimated decline in net interest income in down 100 and 200 basis point rate scenarios, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates are summarized below.

~~Net interest~~

Change in Rates

-200 -100
+100

+200

Basis Points

Basis Points

Basis Points

Basis Points

% Change from base net interest income at June 30, 2019
-10.14 % -1.37 % 3.01 % 6.03 %

~~income %~~

~~change~~

~~Increase 200 bp~~

~~2.11~~

~~Increase 100 bp~~

~~1.06~~

~~Decrease 100 bp~~

~~(0.94)~~

~~Decrease 200 bp~~

~~(7.07)~~

Approximately 60% of Bancorp’s loan portfolio has fixed rates ~~and~~with 40% ~~of its loan portfolio is~~ priced at variable rates. ~~With the Prime rate currently at 5.00%, virtually all of~~ Bancorp’s variable rate loans ~~now have interest rates at or~~are above their ~~floors. This effect is captured in the simulation analysis above. New~~floors and ~~renewed fixed-rate loan pricing is subject to competitive conditions and prevailing interest rates. Fixed-rate loan pricing is generally indexed to the five-year treasury rate, and~~will reprice as ~~the yield curve continues to flatten, fixed-rate loans may not provide a significant lift in yields.~~

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~~Stock Yards Bancorp, inc. and subsidiary~~

rates change.

Undesignated derivative instruments described in Note 17 to Bancorp’s consolidated financial statements 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.~~income as interest rates fluctuate. 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 1718 to Bancorp’s consolidated financial statements 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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Provision for Loan and Lease Losses

The provision for loan losses represents a charge to earnings necessary to maintain 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 ~~the~~ results of an allowance methodology that is driven by risk ratings, historical losses, specific loan loss allocations, and qualitative factors. Bancorp recorded provision of $0 and $600 thousand for the three and six month periods ended June 30, 2019, respectively, as compared with $1.2 million and $2.0 million for the same periods in 2018. The provision represents a charge to earnings necessary to maintain an allowance that, in management’s evaluation, is adequate to provide coverage for the inherent losses on outstanding loans. The provision reflects many factors including trends in the portfolio, as well as changes in quantitative and qualitative factors. Continued strong credit metrics and net recoveries of $282 thousand for the first six months of ~~2018,~~2019 resulted in an allowance to total loans of 0.96% as of June 30, 2019, compared with 0.96% as of June 30, 2018. In management’s opinion, the allowance remained adequate to cover potential losses within the portfolio.

Key indicators of loan quality remained consistent with the prior year with the exception of increased classified balances, defined as other assets especially mentioned (“OAEM”), substandard, and non-performing loans, which increased $23.4 million during the ~~resulting allowance level, reflected a number~~first half of ~~factors, including application of qualitative considerations resulting~~2019, as compared with December 31, 2018. The increase was concentrated in OAEM loans, as two commercial relationships, which were well-secured, moved from ~~exceptional loan growth.~~the Watch category into OAEM. Consistent with Bancorp’s methodology, the historical look-back period was extended from 2832 to 3236 quarters in the first quarter of ~~2018 in order to capture the effects of a full economic cycle. This expansion of the look-back period was applied~~2019 to all classes and segments of the portfolio. Management believes the expansion of the look-back period more accurately represents the current level of risk in the loan ~~portfolio. By extending~~portfolio, and captures the effects of a full economic cycle. Based on the look-back period ~~to 32 quarters to capture historical loss data for a full economic cycle,~~extension, the allowance level increased approximately ~~$1.3 million compared with a 28 quarter look-back period as of March 31, 2018.~~

~~Bancorp recorded loan loss provision of $1.2 million and~~ $2.0 million for 2019. Additional information regarding Bancorp’s methodology for evaluating the ~~three~~adequacy of the allowance can be read in the Company’s Annual Report on Form 10-K.

Non-performing loans, consisting of TDRs, non-accrual loans, and ~~six month periods ended~~loans over 90 days past due still accruing, increased to $3.9 million at June 30, 2019 from $3.4 million at December 31, 2018, ~~respectively, as compared with $600 thousand and $1.5~~while decreasing $3.5 million for the same periods in 2017. The increases corresponded with significant loan growth experienced in the first six months of 2018 and other qualitative considerations. Key indicators of loan quality remained consistent with prior years.from $7.4 million at June 30, 2018. Bancorp considers the present asset quality metrics to be ~~strong;~~exceptional; however, recognizing the cyclical nature of the lending business, this trend is expected to normalize over the long term. ~~Non-performing loans, consisting of TDRs, non-accrual loans, and loans over 90 days past due still accruing, decreased to $7.4 million at June 30, 2018 from $9.3 million at June 30, 2017.~~

Bancorp’s loan portfolio is diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in the metropolitan areas of Louisville, Indianapolis and Cincinnati. The adequacy of the allowance is monitored on an ongoing basis and it is the opinion of management that the balance of the allowance ~~for loan losses~~ at June 30, ~~2018~~2019 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.

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~~Stock Yards Bancorp, inc. and subsidiary~~

An analysis of the changes in the allowance ~~for loan losses~~ and selected ratios ~~for the three and six month periods ended June 30, 2018 and 2017~~ follows:

(Dollars in thousands)

Three months ended June 30,

Six months ended June 30,

2018

2017

2018

2017

Balance at the beginning of the period
$ 24,203 $ 24,481 $ 24,885 $ 24,007
Provision for loan losses
1,235 600 1,970 1,500
Loan charge-offs, net of recoveries
(565 ) 34 (1,982 ) (392 )
Balance at the end of the period
$ 24,873 $ 25,115 $ 24,873 $ 25,115
Average loans, net of unearned income
$ 2,523,450 $ 2,280,122 $ 2,478,305 $ 2,286,795
Provision for loan losses to average loans (1)
0.05 % 0.03 % 0.08 % 0.07 %
Net loan charge-offs to average loans (1)
0.02 % 0.00 % 0.08 % 0.02 %
Allowance for loan losses to average loans
0.99 % 1.10 % 1.00 % 1.10 %
Allowance for loan losses to period-end loans
0.96 % 1.09 % 0.96 % 1.09 %

(Dollars in thousands)	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018

Balance at the beginning of the period	$	26,464		$	24,203		$	25,534		$	24,885
Provision		—			1,235			600			1,970
Total charge-offs		161			647			260			2,175
Total recoveries		(113	)		(82	)		(542	)		(193	)
Total net loan charge-offs (recoveries)		48			565			(282	)		1,982
Balance at the end of the period	$	26,416		$	24,873		$	26,416		$	24,873
Average loans, net of unearned income	$	2,658,036		$	2,523,450		$	2,593,712		$	2,478,305

Provision to average loans (1)		0.00	%		0.05	%		0.02	%		0.08	%
Net loan charge-offs (recoveries) to average loans (1)		0.00	%		0.02	%		(0.01	)%		0.08	%
Allowance to average loans		0.99	%		0.99	%		1.02	%		1.00	%
Allowance to total loans		0.96	%		0.96	%		0.96	%		0.96	%

(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. ~~The increases in net~~One significant commercial and industrial loan ~~charge-offs during 2018 over comparable 2017 periods were attributed primarily to one commercial~~ relationship totaling $1.3 million was charged ~~down~~off to its net realizable ~~value.~~value in the first quarter of 2018, which resulted in increased net charge offs for the six month period ending June 30, 2018. The ~~decline~~increase in the allowance in the ~~first six months~~second quarter of 2019 as compared with the same period in 2018 was mainly due to ~~loan growth~~qualitative considerations and ~~the commercial loan charge-off that had been previously reserved, and remained adequate to cover potential losses in the loan portfolio, in management’s opinion.~~

net recoveries of $282 thousand.

An analysis of net charge-offs (recoveries) by loan ~~category for the three and six month periods ended June 30, 2018 and 2017~~portfolio segment follows:

													Three months						Six months
(In thousands)	Three months						Six months						ended June 30,						ended June 30,
	ended June 30,						ended June 30,						2019			2018			2019			2018
Net loan charge-offs (recoveries)	2018			2017			2018			2017

Commercial and industrial	$	528		$	(43	)	$	1,927		$	362		$	(4	)	$	528		$	(103	)	$	1,927
Construction and development, excluding undeveloped land		-			-			-			-			—			—			(203	)		—
Undeveloped land		-			-			-			-			—			—			—			—
Real estate mortgage - commercial investment		-			(34	)		(2	)		(35	)		(1	)		—			(1	)		(2	)
Real estate mortgage - owner occupied commercial		-			-			-			-			—			—			(20	)		—
Real estate mortgage - 1-4 family residential		-			(3	)		-			(4	)		(17	)		—			(17	)		—
Home equity		(2	)		-			(4	)		9			(1	)		(2	)		(1	)		(4	)
Consumer		39			46			61			60			71			39			63			61
Total net loan charge-offs	$	565		$	(34	)	$	1,982		$	392
Total net loan charge-offs (recoveries)													$	48		$	565		$	(282	)	$	1,982

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~~Stock Yards Bancorp, inc.~~Non-interest Income and ~~subsidiary~~Non-interest Expenses

	Three months ended June 30,										Six months ended June 30,

(Dollars in thousands)	2019		2018		$ Change			% Change			2019		2018		$ Change			% Change

Non-interest income:
Wealth management and trust services	$	5,662	$	5,344	$	318			6.0	%	$	11,101	$	10,844	$	257			2.4	%
Deposit service charges		1,336		1,447		(111	)		(7.7	)		2,583		2,858		(275	)		(9.6	)
Debit and credit card income		2,168		1,689		479			28.4			3,912		3,197		715			22.4
Treasury management fees		1,202		1,113		89			8.0			2,359		2,160		199			9.2
Mortgage banking income		796		746		50			6.7			1,278		1,322		(44	)		(3.3	)
Net investment product sales commissions and fees		364		397		(33	)		(8.3	)		720		801		(81	)		(10.1	)
Bank owned life insurance		184		191		(7	)		(3.7	)		362		378		(16	)		(4.2	)
Other		551		508		43			8.5			1,010		784		226			28.8
Total non-interest income	$	12,263	$	11,435	$	828			7.2	%	$	23,325	$	22,344	$	981			4.4	%
Non-interest expenses:
Compensation	$	12,715	$	11,703	$	1,012			8.6	%	$	24,516	$	22,673	$	1,843			8.1	%
Employee benefits		2,908		2,512		396			15.8			5,550		5,145		405			7.9
Net occupancy and equipment		1,976		1,811		165			9.1			3,834		3,629		205			5.6
Technology and communication		1,848		1,685		163			9.7			3,621		3,315		306			9.2
Debit and credit card processing		631		579		52			9.0			1,218		1,145		73			6.4
Marketing and business development		903		805		98			12.2			1,528		1,451		77			5.3
Postage, printing, and supplies		410		400		10			2.5			816		791		25			3.2
Legal and professional		1,523		504		1,019			202.2			2,057		997		1,060			106.3
FDIC insurance		248		238		10			4.2			486		480		6			1.3
Amortization/impairment of investment in tax credit partnerships		52		58		(6	)		(10.3	)		104		58		46			79.3
Capital and deposit based taxes		967		862		105			12.2			1,871		1,714		157			9.2
Other		1,283		979		304			31.1			2,502		1,765		737			41.8
Total non-interest expenses	$	25,464	$	22,136	$	3,328			15.0	%	$	48,103	$	43,163	$	4,940			11.4	%

Non-interest income ~~Income and Expenses~~– WM&T

~~The following table sets forth major components of non-interest income and expenses for the three and six month periods ended June 30, 2018 and 2017.~~

Three months

Six months

ended June 30,

ended June 30,

(In thousands)

2018

2017

% Change

2018

2017

% Change

Non-interest income:

Wealth management and trust services
$ 5,344 $ 5,153 3.7
%
$ 10,844 $ 10,247 5.8
%
Deposit service charges
1,447 1,516 (4.6 ) 2,858 3,015 (5.2 )
Debit and credit cards
1,689 1,514 11.6 3,197 2,920 9.5
Treasury management
1,113 1,082 2.9 2,160 2,104 2.7
Mortgage banking
746 897 (16.8 ) 1,322 1,599 (17.3 )
Net investment product sales commissions and fees
397 357 11.2 801 743 7.8
Bank owned life insurance
191 556 (65.6 ) 378 760 (50.3 )
Other
508 450 12.9 784 759 3.3
Total non-interest income
$ 11,435 $ 11,525 (0.8
%)
$ 22,344 $ 22,147 0.9
%

Non-interest expenses:

Compensation
$ 11,703 $ 10,566 10.8
%
$ 22,673 $ 21,235 6.8
%
Employee benefits
2,512 2,282 10.1 $ 5,145 5,024 2.4
Net occupancy and equipment
1,811 1,782 1.6 3,629 3,689 (1.6 )
Technology and communication
2,264 2,120 6.8 4,460 3,968 12.4
Marketing and business development
805 687 17.2 1,451 1,132 28.2
Postage, printing, and supplies
400 382 4.7 791 753 5.0
Legal and professional
504 642 (21.5 ) 997 1,071 (6.9 )
FDIC insurance
238 244 (2.5 ) 480 474 1.3
Amortization/impairment of investment in tax credit partnerships
58 615 (90.6 ) 58 1,231 (95.3 )
Capital and deposit based taxes
862 766 12.5 1,714 1,530 12.0
Other
979 1,123 (12.8 ) 1,765 2,097 (15.8 )
Total non-interest expenses
$ 22,136 $ 21,209 4.4
%
$ 43,163 $ 42,204 2.3
%

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~~Stock Yards Bancorp, inc. and subsidiary~~

~~Non-interest income~~

The largest component of non-interest income is ~~wealth management and trust~~WM&T revenue. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. Trust assets under management totaled $3.07 billion at June 30, 2019, a 7.6% increase compared with $2.85 billion at June 30, 2018, and a ~~7.9%~~11.0% increase ~~compared with $2.64~~from $2.76 billion at ~~June 30, 2017. Assets under management~~December 31, 2018. AUM are stated at market ~~value and the 2018 increase was the result of both a rising stock market year over year and a continuance of new clients added.~~value. WM&T revenue, which ~~constitutes an average of 49%~~represents approximately 46.2% of non-interest income, increased ~~$191~~$318 thousand, or ~~3.7%~~6.0%, and ~~$597~~$257 thousand, or ~~5.8%~~2.4%, respectively, for the three and six month periods ended June 30, 2018 respectively, compared with the same periods in 2017. Recurring fees, which generally comprise over 98% of the WM&T revenue, increased $162 thousand, or 3.2%, and $586 thousand or 5.8% for the respective three and six month periods ended June 30, 2018,2019, as compared with the same periods in ~~2017.~~ 2018 consistent with increased new business generation and strong market performance for the quarter.

Recurring fees earned for managing accounts are based on a percentage of market value of ~~the assets under management~~AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise over 97% of the WM&T revenue, increased $225 thousand, or 4.3% and $142 thousand or 1.3%, respectively, for the three and six month periods ended June 30, 2019, as compared with the same periods in 2018. Some revenues of the WM&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, and is also based on the market value of ~~assets under management.~~AUM. Total non-recurring fees increased ~~$42~~$93 thousand or 103.3% and ~~$11~~$115 thousand or 59.5% for the respective three and six month periods ended June 30, ~~2018, respectively,~~2019, as compared with the same time periods ~~in 2017.~~of 2018. Contracts between WM&T and their clients do not permit performance based fees and accordingly, none of the fees earned by WM&T are performance based. Management believes the WM&T department will continue to factor significantly in Bancorp’s financial results and provide strategic diversity to revenue streams. ~~Management is optimistic that the WM&T department will deliver growth in 2018, but increased market volatility could affect short-term results.~~

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Trust Assets Under Management by Account Type
	June 30, 2019				June 30, 2018
(In thousands)	Managed		Non- managed (1)		Managed		Non- managed (1)
Investment advisory accounts	$	1,263,348	$	20,251	$	1,118,499	$	18,121
Personal trust accounts		562,655		89,794		561,701		80,723
Personal individual retirement acounts		394,429		2,632		360,046		1,802
Corporate retirement accounts		48,073		397,708		49,548		394,067
Foundation and endowment accounts		216,789		1,247		196,268		-

Total accounts	$	2,485,294	$	511,632	$	2,286,062	$	494,713
Custody and safekeeping accounts		—		71,402		—		70,875

	$	2,485,294	$	583,034	$	2,286,062	$	565,588
Total managed and non-managed assets	$	3,068,328			$	2,851,650

(1) Non-managed assets represent those for which WM&T does not have investment discretion.

The ~~following~~ table above provides information regarding ~~assets under management (AUM)~~AUM by WM&T&T. This table demonstrates that as of June 30, ~~2018 and 2017. This table demonstrates that:~~2019:

• Approximately ~~80%~~81% of AUM are actively managed.

• ~~Non-managed employee benefit~~Corporate retirement plan accounts consist primarily of participant directed assets.

• The amount of custody and safekeeping accounts is insignificant, and

• The majority of managed assets are in investment advisory, personal trust, ~~agency,~~ and ~~investment advisory~~agency accounts.

Assets Under Management by Account Type

June 30, 2018

June 30, 2017

Assets

Assets

(In thousands)

Managed

Non-managed (1)

Managed

Non-managed (1)

Personal trust accounts
$ 561,701 $ 80,723 $ 546,758 $ 96,142
Personal individual retirement acounts
360,046 1,802 325,186 7,019
Corporate retirement accounts
49,548 394,067 53,511 364,288
Investment advisory accounts
1,118,499 18,121 952,783 20,787
Foundation and endowment accounts
196,268 - 212,553 -

Total fiduciary accounts
$ 2,286,062 $ 494,713 $ 2,090,791 $ 488,236
Custody and safekeeping accounts
- 70,875 - 63,658

Totals
$ 2,286,062 $ 565,588 $ 2,090,791 $ 551,894
Total managed and non-managed assets
$ 2,851,650 $ 2,642,685

	June 30,
(In thousands)	2019		2018

Interest bearing deposits	$	129,561	$	95,387
US Treasury and government agency obligations		56,083		47,574
State, county and municipal obligations		134,268		140,372
Money market mutual funds		4,461		7,670
Equity mutual funds		603,308		580,199
Other mutual funds - fixed, balanced, and municipal		307,068		302,400
Other notes and bonds		175,014		142,123
Common and preferred stocks		949,410		844,004
Real estate mortgages		342		361
Real estate		50,001		51,124
Other miscellaneous assets (1)		75,778		74,848

Total managed assets	$	2,485,294	$	2,286,062

(1) ~~Non-managed assets represent those for which WM&T does not have~~Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment ~~discretion.~~trusts,and oil and gas rights.

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~~Stock Yards Bancorp, inc. and subsidiary~~

The table ~~below~~above presents data regarding WM&T managed assets by class of ~~investment for the periods ending June 30, 2018 and 2017.~~investment. Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations. This table demonstrates ~~that:~~that as of June 30, 2019:

	•	~~Managed assets are invested in instruments for which market values can be readily determined.~~
	•	~~The majority of these instruments are sensitive to market fluctuations.~~
	•	The composition of managed assets is divided approximately 62% in equities and 38% in fixed income securities, and this composition is relatively consistent from ~~year~~period to ~~year,~~period, and

•

WM&T has no proprietary mutual funds.

~~The bank has no proprietary mutual funds.~~

Managed Assets by Class of Investment

As of June 30,

(In thousands)

2018

2017

Interest bearing deposits
$ 95,387 $ 117,437
US Treasury and government agency obligations
47,574 38,001
State, county and municipal obligations
140,372 134,091
Money market mutual funds
7,670 8,496
Equity mutual funds
580,199 509,785
Other mutual funds - fixed, balanced, and municipal
302,400 308,493
Other notes and bonds
142,123 110,333
Common and preferred stocks
844,004 766,796
Real estate mortgages
361 378
Real estate
51,124 43,974
Other miscellaneous assets (1)
74,848 53,007

Total managed assets
$ 2,286,062 $ 2,090,791

Fiduciary and Related Trust Services Income
	Three months ended June 30,				Six months ended June 30,
(In thousands)	2019		2018		2019		2018

Investment advisory accounts	$	2,246	$	2,070	$	4,377	$	4,149
Personal trust accounts		1,894		1,864		3,698		3,782
Personal individual retirement accounts		931		869		1,821		1,742
Corporate retirement accounts		316		361		643		740
Foundation and endowment accounts		140		134		273		285
Custody and safekeeping accounts		30		30		61		86
Brokerage and insurance services		13		7		38		30
Other		92		9		190		30

Total WM&T services	$	5,662	$	5,344	$	11,101	$	10,844

~~(1) Includes rights, warrants, annuities, insurance policies, unit investment trusts, and oil and gas rights.~~

The table ~~below~~above provides information regarding fee income earned by Bancorp’s WM&T ~~department for the three and six-month periods ended June 30, 2018 and 2017.~~department. It demonstrates that WM&T fee revenue is earned most significantly from personal trust and investment advisory accounts. Fees are based on AUM and tailored for individual accounts and/or relationships. WM&T uses a fee structure that ~~considers and tailors~~is tailored based on account type ~~of account~~ and other factors. For example, fee structures are in place for investment management, irrevocable trusts, revocable trusts, ~~IRA~~individual retirement accounts (“IRAs”), and accounts holding only fixed income securities. There are also fee structures for estate settlements, which are non-recurring, and retirement plan services which typically consist of a one-time conversion fee with recurring AUM fees to follow. All fees are based on the market value of each account and are tiered based on account size, with larger relationships paying a lower percentage of AUM in fees. Fees are agreed upon at the time the account is opened and these and any subsequent revisions are communicated in writing to the customer. Fees earned are not performance based nor are they based on investment strategy or transactions.

Fiduciary and Related Services Income

Three months ended

Six months ended

June 30,

June 30

(In thousands)

2018

2017

2018

2017

Personal trust accounts
$ 1,864 $ 1,889 $ 3,782 $ 3,832
Personal individual retirement accounts
869 807 1,742 1,594
Corporate retirement accounts
361 389 740 788
Investment advisory accounts
2,070 1,828 4,149 3,576
Foundation and endowment accounts
134 133 285 265
Custody and safekeeping acounts
30 47 86 83
Brokerage and insurance services
7 10 30 19
Other
9 50 30 90

Total
$ 5,344 $ 5,153 $ 10,844 $ 10,247

~~Table~~Additional sources of ~~Contents~~

~~Stock Yards Bancorp, inc. and subsidiary~~

non-interest income

Deposit service charges decreased ~~$69~~$111 thousand, or ~~4.6%~~7.7%, and ~~$157~~$275 thousand, or ~~5.2%~~9.6%, respectively, for the ~~first~~ three and six month periods ~~of 2018, respectively,~~ended June 30, 2019, as compared with the same periods in ~~2017.~~2018. Service charge income is driven by transaction volume, which can fluctuate ~~throughout the year.~~from period to period. Both the quarterly and year-to-date ~~variances reflect declines~~decreases are consistent with the decline in fees earned on overdrawn checking ~~accounts, which decreased by $42 thousand and $98 thousand for the respective three and six month periods ended June 30, 2018. Management~~accounts. While management expects this source of revenue to slowly decline due to anticipated changes in customer behavior, including reduced check volume, and ongoing regulatory ~~restrictions.~~restrictions, the decline is anticipated to be less significant than what was experienced in the first half of 2019.

Debit and credit card revenue increased ~~$175~~$479 thousand, or ~~11.6%~~28.4%, and ~~$277~~$715 thousand, or ~~9.5%~~22.4%, for the respective three and six month periods ended June 30, ~~2018,~~2019, as compared with the same periods in ~~2017. Bankcard transaction revenue primarily represents income~~2018. The increases in both the ~~Bank derives from customers’ use of debit~~three and ~~credit cards. The increase in second quarter and year-to-date revenues primarily~~six month comparisons reflected increased volume resulting from ~~commercial credit cards, as this product is still~~continued growth in ~~its early development at~~ the Company. Commercial credit card income increased $87 thousand or 32.8% and $156 thousand or 29.9% for the respective three and six month periods ended June 30, 2018, compared with the same periods of 2017.customer base. Volume, which is dependent ~~upon~~on customer behavior and new accounts, is expected to continue to increase. ~~In contrast, interchange income is based on rates set by service providers in a competitive market. Debit~~Credit card interchange income increased ~~$88~~$184 thousand, or ~~7.1%~~52.17%, and ~~$121~~debit card interchange and ancillary fees increased $295 thousand or ~~5.1% for~~22.0%, in the ~~three and six months periods ended June 30, 2018, respectively,~~second quarter of 2019, as compared with the same ~~periods~~period in 2018. Second quarter 2019 debit card revenue included a non-recurring fee of ~~2017. Bancorp expects a slight decrease~~$176 thousand from its card processor for reaching activity incentive thresholds. For the first six months of 2019, credit card interchange income increased $328 thousand, or 48.8%, and debit card interchange and ancillary fees increased $387 thousand or 15.3%, as compared with the same period in ~~interchange rates as service providers gravitate to lower cost options within the market, however, growth in accounts is anticipated to offset the decline in rates.~~2018.

Treasury management ~~revenue~~fees primarily consists of fees earned for cash management services provided to commercial customers. Treasury management fee income increased as a result of higher volumes $31 thousand, or 2.9%, and $56 thousand or 2.7% for the three and six month periods ended June 30, 2018, respectively, as compared with the same periods in 2017. This category has been a growing source of revenue for ~~Bancorp.~~Bancorp including increases in the second quarter of 2019 of $89 thousand or 8.0%, and $199 thousand, or 9.2%, for the first six months of 2019, as compared with the same periods in 2018. Bancorp continues to expect growth in this income category in ~~2018~~2019 based upon ~~continued penetration into its large commercial~~an expanding customer base, as more existing customers take advantage of ~~offered~~these services.

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Mortgage banking ~~revenue~~income primarily includes gains on sales of mortgage loans. Bancorp’s mortgage banking department originates residential mortgage loans to be sold in the secondary ~~market.~~market, primarily to the Federal National Mortgage Association (“FNMA”). Interest rates on the loans sold to FNMA are locked with the borrower and investor prior to closing the loans, thus Bancorp bears no interest rate risk related to ~~these loans.~~loans sold. The department offers conventional, VAVeterans Administration (“VA”) and ~~FHA~~Federal Housing Authority (“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 department. Mortgage banking revenue ~~decreased $151~~increased $50 thousand, or ~~16.8%~~6.7%, ~~and $277~~while decreasing $44 thousand, or ~~17.3%~~3.3%, for the respective three and six month periods ended June 30, ~~2018,~~2019, as compared with the same periods in ~~2017, primarily due to lower transaction volume. Rising interest~~2018. Transaction volume increased in the second quarter of 2019, as declining mortgage rates ~~in 2018~~ resulted in ~~a slowing of~~increased refinancing activity. Bancorp anticipates refinancing activity ~~which affected both~~to continue to increase into the ~~quarterly and year-to-date results.~~

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~~Stock Yards Bancorp, inc. and subsidiary~~third quarter provided mortgage rates continue to decline.

~~Investment~~Net investment product sales commissions and fees ~~net of variable costs increased $40~~decreased $33 thousand, or ~~11.2%~~8.3%, and ~~$58~~$81 thousand, or ~~7.8%~~10.1%, respectively, for the ~~three~~quarterly and six month periods ended June 30, ~~2018,~~2019, as compared with the same periods in ~~2017.~~2018. The ~~increases in both periods~~decreases correspond primarily to overall brokerage ~~volume. Investment product sales~~volume, as market volatility has somewhat discouraged investment activity in 2019. 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 WM&T department.

~~Income related to bank-owned~~Bank owned life insurance (BOLI) decreased $365 thousand or 65.6%, and $382 thousand or 50.3%, respectively, for the three and six months periods ended June 30, 2018, as compared with the same periods in 2017, primarily as a result of receiving death benefit proceeds of $348 thousand in the second quarter of 2017. Decreasing crediting rates received on investments also resulted in reduced revenue in both the three and six month comparisons. BOLI(“BOLI”) assets represent the cash surrender value of 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~~serves to offset the cost of various employee benefits.

~~Other non-interest income increased $58~~ Income related to BOLI decreased $7 thousand, or ~~12.9%~~3.7%, and ~~$25~~$16 thousand, or ~~3.3%~~4.2%, respectively, for the three and six month periods ended June 30, ~~2018, respectively,~~2019 as compared with the same time periods in ~~2017. Death benefit proceeds~~2018, as a result of ~~$113~~lower crediting rates on investments.

Other non-interest income increased $43 thousand, or 8.5%, for the second quarter of 2019, as compared with the same period in 2018, and $226 thousand, or 28.8%, for the first six months of 2019, as compared with the same period in 2018. In the first quarter of 2019 Bancorp recognized income of $126 thousand related to incentive received to relocate a banking center location and recorded income of $130 thousand in the second quarter of ~~2018 from~~2019 related to a ~~non-BOLI policy resulted~~historic tax-credit investment tax distribution. The impact of King on non-interest income has been and is expected to continue to be nominal in ~~positive variances for both the three and six month comparisons. This category includes a variety of other income sources, none of which resulted in individually significant variances.~~2019.

Non-interest expenses

Compensation, which includes salaries, incentives, bonuses, and ~~share~~stock based compensation, increased ~~$1.1~~$1.0 million, or ~~10.8%~~8.6%, and ~~$1.4~~$1.8 million, or ~~6.8%~~8.1%, respectively, for the ~~first three~~quarterly and ~~six months~~six-month periods ~~of 2018, respectively,~~ended June 30, 2019, as compared with the same periods in ~~2017. The increase in both~~2018. Non-recurring severance and employee retention expenses resulting from the King acquisition totaled $437 thousand for the three ~~month~~ and six month ~~period comparisons reflected higher salary as well as increased production and performance based compensation,~~periods ended June 30, 2019. Personnel additions related to Bancorp’s growth, including ~~stock compensation.~~the King acquisition drove the remainder of the increase. At June 30, ~~2018,~~2019, Bancorp had ~~581~~615 full-time equivalent employees including 28 employees added from the King acquisition, as compared with ~~585~~581 at June 30, ~~2017.~~2018.

Employee benefits consists of all personnel related expense not included in compensation, with the ~~two~~ most significant items being health insurance, payroll taxes, and ~~payroll taxes.~~retirement plan contributions. Employee benefits increased ~~$230~~$396 thousand, or ~~10.1%~~15.8%, and ~~$121~~$405 thousand, or ~~2.4%~~7.9%, respectively for the ~~respective~~ three and six month periods ended June 30, ~~2018,~~2019, as compared with the same periods in ~~2017. Health~~2018. Increased 401K match contributions, higher health insurance ~~expense increased $176 thousand~~claims paid by the Company, and ~~$102 thousand~~higher employee recruiting costs resulted in the ~~respective three and six month period comparisons. Bancorp is self-insured, and health insurance costs fluctuate based on levels of claims. Bancorp’s 401K match contribution expense increased $48~~increases. King acquisition related one-time employee benefit expenses totaled $57 thousand ~~and $92 thousand in~~for the ~~respective~~ three and six month periods ended June 30, ~~2018, reflecting a growing employee base, higher salaries and levels of participation.~~2019.

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~~Stock Yards Bancorp, inc. and subsidiary~~

Net occupancy and equipment expense increased ~~$29~~$165 thousand, or ~~1.6% in the second quarter, while decreasing $60~~9.1%, and $205 thousand, or ~~1.6%~~5.6%, respectively, for the three and six month ~~period~~periods ended June 30, ~~2018, respectively,~~2019, as compared with the same periods in ~~2017. The increase in second quarter expense was due primarily to higher rent of and increased real property taxes. The decrease~~2018. Bancorp added five branch locations in the ~~first~~King acquisition, which impacted this category beginning in May 2019, adding $80 thousand of additional expense for the three and six ~~months~~month periods ended June 30, 2019. Bancorp expect to divest of ~~2018 was~~three acquired branch locations in Louisville during the third quarter of 2019 due to ~~lower year-to-date~~their proximity to existing Bancorp branches. This category primarily includes rent, ~~of $127 thousand partially offset by increased real property taxes~~depreciation, and ~~higher personal property taxes thousand.~~maintenance, variances for which were not 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.

Technology and communications expense increased ~~$144~~$163 thousand, or ~~6.8%~~9.7%, and ~~$492 thousand~~$306, or ~~12.4%~~9.2%, inrespectively, for the ~~first~~ three and six month periods ~~of 2018, respectively,~~ended June 30, 2019, as compared with the same periods in ~~2017. The increases were partially a result of~~2018 due largely to increases in computer infrastructure ~~upgrade~~upgrades and maintenance costs. These expenses include ongoing computer software amortization, equipment depreciation, and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security, and internal resources. ~~Technology~~King related ~~licensing~~one-time technology and ~~maintenance agreements increased $85~~communication expenses totaled $104 thousand infor the ~~second quarter of 2018 and $222 thousand in the six month period compared with the same time periods in 2017. Debit and credit card expenses increased $90 thousand and $155 thousand in the respective~~ three and six month periods ended June 30, ~~2018,~~2019.

Bancorp outsources processing for debit and credit card operations, which generate significant revenue for the Company. These expenses increase as transaction volume increases, offsetting a portion of corresponding revenue growth. Debit and credit card processing expense increased $52 thousand, or 9.0%, and $73 thousand, or 6.4%, for the three month and six month periods ended June 30, 2019, respectively, as compared with the same periods in ~~2017, largely~~2018, as a result of a growing customer base and increased transaction ~~volume, particularly with the growing commercial credit card portfolio.~~volume.

Marketing and business development expenses include all costs associated with promoting Bancorp, community investment, retaining customers, and acquiring new business. ~~These~~Marketing and business development expenses increased ~~$118~~$98 thousand, or ~~17.2%, and $319 thousand, or 28.2%~~12.2%, in the ~~respective three and six month periods ending June 30, 2018~~second quarter of 2019, as compared with the ~~same~~second quarter of 2018. Marketing and business development expenses increased $77 thousand, or 5.3%, for the six months ended June 30, 2019. The 2019 increases were largely due to increased community support expenses, which can fluctuate between periods due to the nature and timing of ~~2017, due largely~~the expense, but is expected to ~~a procedural change that led~~trend to ~~timing differences~~historical annual levels over the remainder of 2019.

Postage, printing and supplies expenses increased $10 thousand, or 2.5%, and $25 thousand, or 3.2%, in ~~recognizing community donation expenses. Donations were $38 thousand and $202 thousand higher for~~ the respective three and six month periods ended June 30, ~~2018,~~2019, as compared with the same time periods in ~~2017. Advertising expenses increased $59 thousand and $60 thousand for the respective three and six month periods,~~2018, primarily due to ~~costs associated with deposit gathering campaigns implemented~~the King acquisition.

Legal and professional fees increased $1.0 million to $1.5 million for the second quarter of 2019 from $504 thousand in the second quarter of 2018.

~~Postage, printing~~ Legal and ~~supplies expenses~~professional fees increased ~~$18~~$1.1 million to $2.1 million for the first half of 2019 from $997 thousand ~~or 4.7%, and $38~~for the first six months of 2018. One-time costs associated with the King acquisition totaled nearly $900 thousand ~~or 5.0%, in~~for the three and six month periods ended June 30, 2018, respectively, as compared with the same periods in 2017. Expenses related to other mail and messenger services were $16 thousand and $18 thousand higher in the respective three and six month periods. Postage expense was reduced in 2017 by a recovery of previously charged expense.

Legal and professional fees decreased $138 thousand, or 21.5%, and $74 thousand or 6.9%, in the respective three and six month periods ending June 30, 2018, as compared with the same periods in 2017. Legal fees decreased $170 thousand and $136 thousand in the respective three and six month periods due to fluctuations2019. Additional costs associated with consulting engagements also contributed to the normal course of business. Professional and consulting fees increased $32 thousand and $62 thousand for the respective three and six month periods due to increased fees associated with first quarter audit work and tax preparation.period increases.

FDIC insurance expense ~~decreased $6 thousand, or 2.5% for the second~~was flat quarter ~~of 2018, while increasing $6 thousand, or 1.3, for the first six months of 2018, as compared with the same periods in 2017.~~over quarter and year over year. The assessment is calculated by the FDIC, and ~~the increase~~any fluctuation in expense is directly related to ~~growth~~changes in Bancorp’s balance sheet.

Amortization/impairment of investments in tax credit partnerships ~~decreased $557 thousand, or 90.6%, and $1,173, or 95.3%, for~~was flat in the ~~three and six month periods ended June 30,~~second quarter of 2019 as compared with the second quarter of 2018, ~~respectively,~~while increasing slightly year-to-date as compared with the same ~~periods~~time period in 2018. Bancorp did not record any expense in the first quarter of ~~2017. This expense reflects amortization/impairment of investments in~~2018. Tax credit partnerships ~~which~~ generate federal income tax credits, and ~~vary widely depending upon the timing and magnitude of investments and related amortization/impairment. For~~for each of Bancorp’s investments in tax credit partnerships, the tax benefit compared with ~~the amortization~~related expenses results in a positive effect on net income. Amounts of credits and corresponding expenses can vary widely depending upon timing and magnitude of the investments. See the Income Taxes section below for details on ~~amortization/impairment~~amortization and income tax impact for these credits.

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~~Stock Yards Bancorp, inc. and subsidiary~~

Other non-interest expenses ~~decreased $144~~increased $304 thousand, or ~~12.8%~~31.1%, and ~~$332,~~$737 thousand, or ~~15.8%~~41.8%, for the respective three and six month periods ended June 30, 2018, as compared with the same periods in 2017. For the three month period ended June 30, reduced losses on other repossessed assets of $63 thousand, decreased losses on bad checks and debit cards of $40 thousand, and reduced MSR amortization of $37 thousand primarily resulted in the overall expense reduction. For the six month period ended June 30, 2018, reduced losses on other repossessed assets of $173 thousand, decreased losses on bad checks and debit cards of $122 thousand, and reduced MSR amortization of $74 thousand drove the overall expense reduction.

~~Income Taxes~~

~~Income tax expense decreased $1.2 million, or 27.5%, and $1.3 million, or 17.2%, for the second quarter and the first six months of 2018,~~ respectively, ~~as compared with the same periods of 2017. The effective rate~~ for the three and six month periods ended June 30, ~~2018 was~~2019, as compared with the same periods in 2018. The quarterly and year-to-date increases were primarily attributed to the following:

●

Quarterly

Director compensation increased $88 thousand.

Rewards expense tied to Bancorp’s growing credit card program increased $87 thousand.

Core deposit intangible amortization increased $30 thousand as a result of the King acquisition

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●

Year-to-date

Director compensation increased $221 thousand.

Rewards expense tied to Bancorp’s growing credit card program increased $140 thousand.

Expense related to bad debt collection increased $80 thousand.

Fraud related losses increased $76 thousand

Gain on sales of other real estate decreased $45 thousand

Core deposit intangible amortization increased $28 thousand as a result of the King acquisition.

Income Taxes

Bancorp recorded income tax expense of $1.0 million and $2.9 million, respectively, for the three and six month periods ended June 30, 2019, compared with $3.2 million and $6.2 million for the same periods in 2018. The effective rate for the corresponding three and six month periods in 2019 were 5.9% and 8.2%, respectively, and 18.9% and 18.7%, respectively, ~~as compared with 29.1% and 26.0%, respectively,~~ for ~~the same periods in 2017.~~2018 The decrease in the effective tax rate from ~~2017~~2018 to ~~2018~~2019 related primarily to two Kentucky state tax law changes.

In March 2019, Kentucky State legislation was ~~due~~enacted requiring financial institutions to transition from a bank franchise tax to the ~~decrease~~Kentucky corporate income tax beginning in 2021. In April 2019, an additional Kentucky tax law change was enacted allowing banks and their holding companies to be combined together for Kentucky tax return filings also beginning in 2021. The combined filing will allow Bancorp’s Holding Company net operating losses to offset against net revenue generated by the Bank and reduce Bancorp’s tax liability. Bancorp recorded significant tax benefits associated with these changes in the ~~federal~~first and second quarters of 2019. During the first six months of 2019, Bancorp recognized a state deferred tax ~~rate from 35% to 21% effective January 1, 2018, as a result of the Tax Cuts~~asset and ~~Jobs Act enacted on December 22, 2018. The 2017 effective tax rate was significantly decreased by the positive effects of stock-based compensation and federal~~corresponding state income tax credits. Bancorp invests in certain partnerships that yield federal income tax credits. These tax credits provided a greater reduction of 2017 tax expense and effective tax rate than 2018. Taken as a whole, the tax benefit of ~~these investments exceeds amortization expense associated with them, resulting in a positive impact on net income.~~$3.8 million, or approximately $0.16 per diluted share. See the income taxes footnote for more detail.

Commitments

As detailed in the Commitments footnote, 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 14.~~

Other commitments discussed in Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, have not materially changed since that report was filed, relative to qualitative and quantitative disclosures of fixed and determinable contractual obligations.

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Financial Condition

~~Financial Condition~~

Balance Sheet

Total assets increased $160.9 million to ~~$3.3~~$3.5 billion as of June 30, ~~2018 compared with $3.2 billion~~2019, from $3.3 million at December 31, ~~2017.~~2018. Bancorp acquired assets totaling approximately $192 million on May 1, 2019 in connection with the King acquisition. In the first six months of ~~2018 an increase~~2019 increases in loans, ~~was~~premises and equipment, and other assets were offset by decreases in cash and cash equivalents, and available for sale securities. Gross loans increased $215.7 million, or 8.5%, including $160.5 million in loans acquired from King. Strong loan production in the second quarter and first six months of 2019 contributed to non-acquisition, or legacy, loan growth of $51.6 million or 2.0% for the six months ended June 30, 2019. Cash and cash equivalents decreased ~~cash held and invested short term~~$82.9 million or 41.7%, as ~~those funds were~~excess liquidity was used to fund loan ~~growth. Loans increased $168~~growth and the King acquisition. Securities available for sale decreased $13.4 million, or ~~7.0%~~3.1%, with the organic loan production and net growth occurring across all markets and in most loan categories. Loan growth reflected ongoing expansion in key lending categories such as commercial and industrial lending and commercial real estate lending. Bancorp has remained well under regulatory guidelines for commercial real estate. Securities available-for-sale increased only by $46 thousand over the first six months of ~~2018. The increase~~2019, as maturing security cash flows were not reinvested but held in the form of short-term liquidity. This decline was ~~net of~~offset somewhat by market value ~~changes~~improvement in the portfolio with net unrealized ~~losses~~gains at June 30, ~~2018~~2019 of ~~$9.2~~$1.7 million as compared with net unrealized losses of ~~$2.9~~$6.7 million at December 31, ~~2017. Included~~2018. Premises and equipment increased $20.3 million or 45.4%, primarily the result establishing a right of use lease asset upon adopting ASU 2016-02, Leases in ~~securities available-for-sale are short term obligations~~the first quarter of ~~U.S. Treasury~~2019 and the addition of five King branches. Other assets increased $17.3 million or ~~U.S. government sponsored entities. These securities, which totaled $200 million at~~36.8% as of June 30, ~~2018 and $150 million at~~2019, as compared with December 31, ~~2017, normally have a maturity~~2018 due primarily to the recognition of ~~less than one month, and are purchased at quarter-end as part of a tax minimization strategy. Funds from other maturing available-for-sale investments were used~~$12.1 million in goodwill related to ~~fund loan growth. Federal Home Loan Bank stock increased $2.7 million or 35.6% to facilitate additional borrowing activity.~~

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~~Stock Yards Bancorp, inc. and subsidiary~~

the King acquisition.

Total liabilities increased ~~$73~~$138.0 million or 4.7% to ~~$2.98~~$3.1 billion as of June 30, ~~2018, compared with $2.91~~2019, from $2.9 billion atas of December 31, ~~2017.~~2018. Liabilities assumed in the King acquisition totaled $176.6 million. Total deposits ~~decreased $37.8~~increased $89.1 million, or ~~1.5%~~3.2%, ~~with increases~~as $125.5 million in deposits assumed from the King transaction offset expected seasonal decreases in Bancorp’s non-interest bearing ~~deposit accounts, $41.3 million or 6.1%.; savings accounts, $6.4 million, or 4.2%;~~deposits, and ~~time deposits, $15.6 million or 6.6%. Interest~~interest bearing demand deposit ~~accounts decreased $52.0~~accounts. For the six month period ending June 30, 2019, non-interest bearing demand deposits increased $66.6 million, or ~~6.2%~~9.4%, ~~as did money market deposit accounts, $49.2~~while interest bearing deposits increased $22.5 million, or ~~7.2%~~1.1%. Securities sold under agreements to repurchase (“SSUAR”) decreased ~~$11.7~~$2.3 million, or ~~16.6%~~6.3%, due to normal cyclical ~~activity.~~activity, and the continuation of customers migrating to higher-yielding, non-collateralized deposits. Federal funds purchased ~~and other short-term borrowing~~ increased ~~$125.1~~$1.8 million, or ~~77.5%~~17.2%, period to ~~period.~~period, as Bancorp uses short-term lines of credit to manage its overall liquidity position. Federal Home Loan Bank (“FHLB”) advances increased $36.1 million, or 74.9%, as Bancorp retained the fixed rate long term advances that were held at King in connection with overall balance sheet funding. Other liabilities ~~decreased $2.9~~increased $13.1 million, or ~~6.3%~~28.0%, largely due to ~~a decrease~~the adoption of ASU 2016-02, Leases, in ~~taxes payable.~~the first quarter of 2019.

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Loan Portfolio Composition

~~Elements~~Composition of ~~Loan Portfolio~~loans, net of deferred fees and costs, by primary loan portfolio class follows:

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

(in thousands)
Loans by Type	June 30, 2018		December 31, 2017
(In thousands)					June 30, 2019		December 31, 2018

Commercial and industrial	$	855,015	$	779,014	$	860,085	$	833,524
Construction and development, excluding undeveloped land		216,068		195,912
Undeveloped land (1)		22,156		18,988
Construction and development, excluding undeveloped land(1)						222,632		225,050
Undeveloped land						35,169		30,092

Real estate mortgage:
Commercial investment		622,777		594,902		696,421		588,610
Owner occupied commercial		420,999		398,685		452,719		426,373
1-4 family residential		277,735		262,110		338,957		276,017
Home equity - first lien		53,257		57,110		46,012		49,500
Home equity - junior lien		66,323		63,981		67,948		70,947
Subtotal: real estate mortgage		1,441,091		1,376,788
Subtotal: Real estate mortgage						1,602,057		1,411,447

Consumer		43,630		38,868		43,937		48,058

Total loans(2)	$	2,577,960	$	2,409,570	$	2,763,880	$	2,548,171

(1)

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

(2)

Unaccreted discounts include accretable and non-accretable discounts and primarily relate to Bancorp's TBOCand King acquisitions in 2012,and 2019, respectively.

Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain ~~sold~~ participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership 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~~portfolio segments with a corresponding liability is recorded in other liabilities. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the total participated portions of loans of this nature were ~~$16.6~~$9.9 million and ~~$18.2~~$10.5 million, respectively.

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~~Stock Yards Bancorp, inc. and subsidiary~~

Allowance for ~~loan losses~~Loan and Lease Losses

An allowance ~~for loan losses~~ has been established to provide for probable losses on loans that may not be fully repaid. The allowance ~~for loan losses~~ is increased by provisions charged to expense and decreased by charge-offs, net of recoveries. Loans are typically charged off when management deems them uncollectible and after underlying collateral has been liquidated; however, collection efforts continue and future recoveries may occur. Periodically, loans are partially charged off to the net realizable value based upon evaluation of related underlying collateral, including Bancorp’s proclivity for resolution.

The allowance methodology is driven by risk ratings, historical losses, and qualitative factors. The level of the June 30, ~~2018~~2019 allowance ~~for loan losses~~ reflected a number of factors, ~~primarily qualitative considerations, loan growth,~~including credit quality metrics which were generally consistent with those experienced in the preceding 12 months, and expansion of the historical look-back period from 2832 quarters to 3236 quarters. This expansion of the historical period was applied to all classes and segments of ~~our~~the portfolio. ~~The expansion~~Expansion of the look-back period for ~~the~~ historical loss rates used in the quantitative allocation caused ~~us to~~ review of the overall methodology for ~~the~~ qualitative factors to ensure we were ~~consistently~~appropriately capturing ~~the~~ risk not addressed in the quantitative historical loss ~~rates used in the quantitative allocation.~~rate. Management believes ~~the~~ extension of the look-back period is appropriate to ensure capture of the impact of a full economic cycle and more accurately represents the current level of risk inherent in the loan portfolio. Key indicators of loan quality continued to trend at levels consistent with prior periods, however management recognizes that due to the cyclical nature of the lending business, these trends will likely normalize over the long term. Additional information regarding Bancorp’s methodology for evaluating the adequacy of the allowance ~~for loan loss~~ can be read in ~~the Company’s annual 10K.~~Bancorp’s Annual Report on Form 10-K.

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As of June 30, ~~2018~~2019 the allowance ~~for loan loss~~ was ~~$24.9~~$26.4 million, ~~virtually even with~~a $882 thousand increase from the December 31, ~~2017~~2018 balance of ~~$24.9~~$25.5 million. For the comparative periods, the allowance as a percent of year-to-date average loans was ~~1.00%~~1.02% and ~~1.07%~~1.01%, respectively. The allowance as a percent of period end loans, as of each period end, 0.96% and ~~1.03%~~1.00%, respectively. The ~~decline in~~allowance balance is reflective of continued strong credit metrics and net recoveries of $282 thousand for the first six months of 2019. As of June 30, 2019, and December 31, 2018, ~~was mainly due to loan growth and charge-offs that had been previously reserved, and~~the allowance remained adequate to cover potential losses in the loan portfolio, in management’s opinion.

Non-performing Loans and Assets

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

(Dollars in thousands)

June 30, 2018

December 31, 2017

Non-accrual loans (1)
$ 6,422 $ 6,511
Troubled debt restructuring
817 869
Loans past due 90 days or more and still accruing
134 2

Non-performing loans
7,373 7,382

Foreclosed real estate
360 2,640

Non-performing assets
$ 7,733 $ 10,022

Non-performing loans as a percentage of total loans
0.29 % 0.31 %
Non-performing assets as a percentage of total assets
0.23 % 0.31 %

(Dollars in thousands)	June 30, 2019			December 31, 2018

Non-accrual loans(1)	$	3,030		$	2,611
Troubled debt restructurings		37			42
Loans past due 90 days or more and still accruing		861			745

Total non-performing loans		3,928			3,398

Other real estate owned		563			1,018

Total non-performing assets	$	4,491		$	4,416

Non-performing loans as a percentage of total loans		0.14	%		0.13	%
Non-performing assets as a percentage of total assets		0.13	%		0.13	%

~~Two lending relationship totaling $4.3 million combined, account for 67% of total~~
(1) No TDRs previously accruing were transferred to non-accrual ~~loans~~during the three and six month periods ending June 30, 2019. No TDRs were on non-accrual as of June 30, 2019 or December 31, 2018.

In total, non-performing assets as of June 30, ~~2018~~2019 were comprised of ~~30 non-accrual~~26 loans, ranging in amount from $5$1 thousand to ~~$1.3 million, four~~$528 thousand, two accruing TDRs, and foreclosed real estate held for sale. Foreclosed real estate held at June 30, ~~2018~~2019 included ~~raw land~~a 1-4 family residential property and a commercial ~~building lot.~~

~~(1)~~

~~No TDRs previously accruing were moved to non-accrual during the three or six month periods ending June 30, 2018. No TDRs were on non-accrual as of June 30, 2018 or December 31, 2017.~~

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~~Stock Yards Bancorp, inc. and subsidiary~~real estate property.

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

~~Non-accrual loans by type~~

(In thousands)	June 30, 2019		December 31, 2018

Commercial and industrial	$	96	$	192
Construction and development, excluding undeveloped land		—		318
Undeveloped land		—		474

Real estate mortgage
Commercial investment		305		138
Owner occupied commercial		1,444		586
1-4 family residential		715		760
Home equity - first lien		—		—
Home equity - junior lien		470		143
Subtotal: Real estate mortgage		2,934		1,627
Consumer		—		—

Total non-accrual loans	$	3,030	$	2,611

(In thousands)

June 30, 2018

December 31, 2017

Commercial and industrial
$ 1,646 $ 321
Construction and development, excluding undeveloped land
380 664
Undeveloped land
474 474

Real estate mortgage

Real estate mortgage - commercial investment
- 52
Real estate mortgage - owner occupied commercial
2,809 3,332
Real estate mortgage - 1-4 family residential
1,108 1,637
Home equity
5 31
Subtotal: Real estate mortgage
3,922 5,052
Consumer loans
- -
Total loans
$ 6,422 $ 6,511

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Liquidity

~~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~~such funds. Liquidity is provided by short-term liquid assets that can be converted to cash, investment securities ~~available-for-sale,~~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~~available for sale marketable investment securities, federal funds sold and interest bearing ~~deposits~~due from accounts with banks. Federal funds sold and interest bearing ~~deposits~~due from bank accounts totaled ~~$10.9~~$64.8 million at June 30, ~~2018.~~2019. 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 $574.6~~

Available for sale securities totaled $423.6 million, at June 30, ~~2018. The portfolio includes maturities of approximately $221.8~~2019, with $132.1 million in securities expected to mature over the next ~~twelve months, including $200 million of short-term securities which matured in July 2018.~~12 months. Combined with federal funds sold and interest bearing ~~deposits,~~due from bank accounts, these offer substantial resources to meet either new loan demand or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of ~~its investment~~the securities portfolio to secure public fund deposits, cash balances of certain ~~wealth management and trust~~WM&T accounts, and ~~securities sold under agreements to repurchase.~~SSUAR. At June 30, ~~2018,~~2019, total investment securities pledged for these purposes comprised ~~57%~~79.4% of the ~~available-for-sale~~available for sale investment portfolio, leaving ~~$248.4~~approximately $87.1 million of unpledged securities.

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~~Stock Yards Bancorp, inc. and subsidiary~~

Bancorp has a ~~large~~significant base of ~~core~~non-maturity customer deposits, defined as demand, savings, money market deposit accounts and time deposits less than or equal to ~~$250,000.~~$250,000 (excluding brokered deposits). At June 30, ~~2018,~~2019, such deposits totaled ~~$2.5~~$2.8 billion and represented ~~98%~~96.5% of Bancorp’s total deposits, as compared with ~~$2.6~~$2.7 billion, or ~~99%~~97.0% of total deposits at December 31, ~~2017.~~2018. Because these deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships they do not put ~~heavy~~significant pressure on liquidity. ~~However, many of Bancorp’s customers’ deposit account balances are historically high.~~ As market conditions continue to improve, these balances may decrease, ~~putting some strain~~placing pressure on Bancorp’s liquidity position. ~~To offset tightening liquidity resulting from loan growth experienced by~~ Bancorp ~~the past four quarters, the Company has begun to add~~began adding liquidity to the balance sheet ~~by implementing a~~in 2018 sheet through targeted certificate of deposit ~~gathering campaign targeting CD~~marketing campaigns. The campaigns generated over $100 million in certificate of deposit growth ~~within Bancorp’s markets. Bancorp has also begun adding brokered deposits as a secondary source of funding. Bancorp had $4.8 million brokered deposits as~~in 2018.

As of June 30, 2019, and December 31, 2018, ~~compared with no~~Bancorp had brokered deposits as of ~~December 31, 2017.~~$29.8 million.

Included in ~~the~~ total deposit balances at June 30, ~~2018~~2019 is ~~$163.2~~$157.4 million of public funds deposits generally comprised of ~~operating~~ accounts from local government agencies and public school districts in ~~our~~the markets ~~as opposed to~~Bancorp operates within. As a result of property tax collections in the latter part of each year these accounts provide seasonal ~~more volatile deposits.~~excess balances that originate with tax payments and decline leading into the subsequent tax season. While this excess liquidity is maintained in low-yielding short-term investments and consequently negatively impacts net interest margin, it has a positive impact on net interest income.

Other sources of funds available to meet daily needs include the sales of ~~securities under agreement to repurchase.~~SSUAR. 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 brokered deposits. At June 30, ~~2018,~~2019, available credit from the FHLB totaled ~~$205.8 million.~~$484.0 million, as compared with $537.0 million as of December 31, 2018. Additionally, Bancorp had available federal funds purchased lines with correspondent banks totaling ~~$105~~$105.0 million at both June 30, 2019, and December 31, 2018. ~~Bancorp also is eligible to borrow from the Federal Reserve Bank of St. Louis based upon value of posted collateral.~~

At June 30, 2018, Bancorp had a total of $275 million of outstanding cash management advances from the FHLB, including a $200 million advance which matured in the first week of July 2018 and was used to manage Bancorp’s overall cash position. Additionally, Bancorp began using additional cash management advances totaling $75 million with weekly maturities during the second quarter to meet short term liquidity needs and supplement the deposit gathering strategy. These additional advances will be added to or reduced as needed to meet short term liquidity needs. Due to the short terms of the advances, they were recorded on the consolidated balance sheet within federal funds purchased and other short-term borrowings.

Bancorp’s principal source of cash is dividends paid to it as sole shareholder of the Bank. At June 30, ~~2018,~~2019, the Bank could pay up to ~~$65.0~~$49.7 million in dividends to Bancorp without regulatory approval subject to the ongoing capital requirements of the Bank. The Bank paid the Holding Company a $28 million dividend in April, 2019, to consummate the acquisition of King and this did not significantly hamper the Bank’s ability to pay future dividends.

Capital Resources

~~Capital Resources~~

At June 30, ~~2018,~~2019, stockholders’ equity totaled ~~$345.5~~$389.4 million, an increase of ~~$11.9~~$22.9 million, or 6.2%, since December 31, ~~2017.~~2018. See the Consolidated Statement of Changes in Stockholders’ Equity for further detail of ~~the~~ changes in equity since ~~the end of 2017.~~2018. One component of equity is accumulated other comprehensive ~~loss~~income (loss) which, for Bancorp, consists of net unrealized gains or losses on securities ~~available-for-sale~~available for sale and hedging instruments, as well as a minimum pension liability, each net of income taxes. Accumulated other comprehensive ~~loss~~income was ~~$7.0~~$1.1 million at June 30, ~~2018~~2019 compared with a loss of ~~$1.9~~$5.1 million on December 31, ~~2017.~~2018. The ~~$5.1 million~~ fluctuation in other comprehensive income is ~~primarily a reflection of the effect~~reflective of the changing interest rate environment during ~~the first six months of 2018 on~~2019 and corresponding impact upon the valuation of Bancorp’s ~~portfolio of~~available for sale securities ~~available-for-sale. Bancorp adopted ASU 2018-02, Income~~ ~~Statement Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~ in the first quarter of 2018. Accordingly, stranded items in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017 totaling $506 thousand were reclassified into retained earnings.portfolio.

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~~Stock Yards Bancorp, inc. and subsidiary~~

The following table sets forth Bancorp’s and the Bank’s risk based capital ~~ratios as of June 30, 2018 and December 31, 2017.~~ratios:

June 30,

December 31,

2018

2017

Total risk-based capital (1)

Consolidated
13.06
%
13.52
%
Bank
12.70 13.07

Common equity tier 1 risk-based capital (1)

Consolidated
12.18 12.57
Bank
11.82 12.12

Tier 1 risk-based capital (1)

Consolidated
12.18 12.57
Bank
11.82 12.12

Leverage (2)

Consolidated
11.19 10.70
Bank
10.85 10.32

	June 30,			December 31,
	2019			2018

Total risk-based capital(1)
Consolidated		12.67	%		13.91	%
Bank		12.45			13.56

Common equity tier 1 risk-based capital(1)
Consolidated		11.82			13.00
Bank		11.60			12.65

Tier 1 risk-based capital(1)
Consolidated		11.82			13.00
Bank		11.60			12.65

Leverage(2)
Consolidated		10.91			11.33
Bank		10.70			11.02

(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~~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.~~assets.

~~In 2013, the Federal Reserve Board~~Bancorp and the ~~FDIC approved rules~~Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that ~~substantially amended~~makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory ~~risk-based~~framework for prompt corrective action, the Holding Company and the Bank must meet specific capital ~~rules applicable~~guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject 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 requiredqualitative judgments by the ~~Dodd-Frank Act. The~~regulators regarding components, risk weightings and other factors.

Banking regulators have categorized the Bank as well-capitalized. For prompt corrective action, the regulations in accordance with 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 minimum capital level requirements applicable to bank holding companies and banks subject to the rules are:

define “well capitalized” as a ~~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 through December 31, 2018, 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:

a6.5% common equity tier 1 risk-based capital ratio, ~~of 7.0%,~~

aan 8.0% tier 1 risk-based capital ratio, ~~of 8.5%, and~~

a 10.0% total risk-based capital ratio and a 5.0% leverage ratio. Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and Bank must hold a capital conservation buffer composed of ~~10.5%.~~

common equity tier 1 risk-based capital above their minimum risk-based capital requirements. The ~~rules allowed banks~~capital conservation buffer phased in from 2016 to 2019 on the following schedule: 0.625% effective January 1, 2016; 1.25% effective January 1, 2017; 1.875% effective January 1, 2018; and ~~their holding companies with less than $250 billion~~a fully phased in ~~assets~~capital conservation buffer of 2.5% on January 1, 2019.

Bancorp continues to exceed the regulatory requirements for total risk-based capital, common equity tier I risk-based capital, tier I risk-based capital and leverage capital. Bancorp and the Bank intend to maintain a ~~one-time opportunity~~capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to ~~opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their~~the capital ~~calculation. Bancorp opted out of this requirement.~~conservation buffer.

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~~Stock Yards Bancorp, inc. and subsidiary~~Non-GAAP Financial Measures

AsThe following table provides a reconciliation of ~~June 30, 2018,~~total stockholders’ equity in accordance with GAAP to tangible stockholders’ equity, a non-GAAP disclosure. Bancorp ~~meets~~provides the ~~requirements to be considered well capitalized under the rules, and is not subject to limitations due to the capital conservation buffer.~~

e)	~~Non-GAAP Financial Measures~~

Intangible book value per share, a non-GAAP measure, in addition to ~~capital ratios~~those defined by banking regulators, Bancorp considers various ratios when evaluating capital adequacy and overhead, including tangible common equity to tangible assets, tangible common equity per share, and adjusted efficiency ratio, all of which are non-GAAP measures.

~~Bancorp believes the tangible common equity ratios are important~~ because of ~~their~~its widespread use by investors as a 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.adequacy.

The following table reconciles Bancorp’s calculation of tangible common equity to amounts reported under ~~US GAAP.~~GAAP:

(In thousands, except per share data)

June 30, 2018

December 31, 2017

Total equity
$ 345,515 $ 333,644
Less core deposit intangible
(1,139 ) (1,225 )
Less goodwill
(682 ) (682 )
Tangible common equity
$ 343,694 $ 331,737

Total assets
$ 3,323,840 $ 3,239,646
Less core deposit intangible
(1,139 ) (1,225 )
Less goodwill
(682 ) (682 )
Total tangible assets
$ 3,322,019 $ 3,237,739

Total shareholders' equity to total assets
10.40
%
10.30
%
Tangible common equity ratio
10.35 10.25

Number of outstanding shares
22,746 22,679

Book value per share
$ 15.19 $ 14.71
Tangible common equity per share
15.11 14.63

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~~Stock Yards Bancorp, inc. and subsidiary~~

(In thousands, except per share data)	June 30, 2019			December 31, 2018

Total stockholders' equity - GAAP	$	389,365		$	366,500
Less: Goodwill		(12,826	)		(682	)
Less: Core deposit intangible		(2,461	)		(1,057	)
Tangible common equity - Non-GAAP	$	374,078		$	364,761

Total assets - GAAP	$	3,463,823		$	3,302,924
Less: Goodwill		(12,826	)		(682	)
Less: Core deposit intangible		(2,461	)		(1,057	)
Tangible assets - Non-GAAP	$	3,448,536		$	3,301,185

Total stockholders' equity to total assets - GAAP		11.24	%		11.10	%
Tangible common equity to tangible assets - Non-GAAP		10.85			11.05

Total shares outstanding		22,721			22,749

Book value per share - GAAP	$	17.14		$	16.11
Tangible common equity per share - Non-GAAP		16.46			16.03

In addition to the efficiency ratio normally presented, Bancorp considers an adjusted efficiency ratio. 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, since amortization expense can fluctuate widely between periods depending upon timing of tax credits, and to other companies who do not invest in these partnerships.

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The following table reconciles Bancorp’s calculation of adjusted efficiency ratios to the ratio reported under ~~US GAAP.~~GAAP:

	Three months ended						Six months ended						Three months ended						Six months ended
	June 30,						June 30						June 30,						June 30,
(Amounts in thousands)	2018			2017			2018			2017
Non-interest expense	$	22,136		$	21,209		$	43,163		$	42,204
(Dollars in thousands)													2019			2018			2019			2018
Non-interest expenses													$	25,464		$	22,136		$	48,103		$	43,163

Net interest income (tax-equivalent)		28,759			25,447			56,161			50,851			30,829			28,759			60,542			56,161
Non-interest income		11,435			11,525			22,344			22,147			12,263			11,435			23,325			22,344
Total revenue	$	40,194		$	36,972		$	78,505		$	72,998		$	43,092		$	40,194		$	83,867		$	78,505

Efficiency ratio		55.1	%		57.4	%		55.0	%		57.8	%
Efficiency ratio - GAAP														59.09	%		55.07	%		57.36	%		54.98	%

(amounts in thousands)

2018

2017

2018

2017

Non-interest expense
$ 22,136 $ 21,209 $ 43,163 $ 42,204
Less: amortization of investments in tax credit partnerships
(58 ) (615 ) (58 ) (1,231 )
Adjusted non-interest expense
22,078 20,594 43,105 40,973

Net interest income (tax-equivalent)
28,759 25,447 56,161 50,851
Non-interest income
11,435 11,525 22,344 22,147
Total revenue
$ 40,194 $ 36,972 $ 78,505 $ 72,998

Adjusted efficiency ratio
54.9 % 55.7 % 54.9 % 56.1 %

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~~Stock Yards Bancorp, inc. and subsidiary~~

	Three months ended						Six months ended
	June 30,						June 30,
	2019			2018			2019			2018
Non-interest expenses	$	25,464		$	22,136		$	48,103		$	43,163
Less: amortization of investments in tax credit partnerships		(52	)		(58	)		(104	)		(58	)
Adjusted non-interest expense		25,412			22,078			47,999			43,105

Net interest income (tax-equivalent)		30,829			28,759			60,542			56,161
Non-interest income		12,263			11,435			23,325			22,344
Total revenue	$	43,092		$	40,194		$	83,867		$	78,505

Adjusted efficiency ratio - Non-GAAP		58.97	%		54.93	%		57.23	%		54.91	%

I~~tem~~Item 3. Quantitative and Qualitative Disclosures about Market ~~Risk~~Risk.

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

Item 4. Controls and ~~Procedures~~Procedures.

~~Disclosure Controls~~As of the end of the period covered by this report, an evaluation was carried out by Stock Yards Bancorp, Inc.’s management, with the participation of its Chief Executive Officer and ~~Procedures~~

~~Bancorp maintains~~Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures ~~designed to ensure that it is able to collect the information it is required to disclose~~(as defined in ~~the reports it files with~~Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s Chief Executive Officer and ~~Exchange Commission (SEC), and to record, process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on their evaluation of Bancorp’s~~Chief Financial Officer concluded that these disclosure controls and procedures were effective as of 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~~end of the ~~information it is required to disclose~~period covered by this report. In addition, no change in ~~reports it files with~~ the ~~SEC within the required time periods.~~

~~Changes in Internal Control over Financial Reporting~~

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 June 30, 2018 in Bancorp’sCompany’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, ~~Bancorp’s~~the Company’s internal control over financial reporting.

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~~Stock Yards Bancorp, inc. and subsidiary~~

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

In the ordinary course of operations, Bancorp and the Bank are defendants in various legal proceedings. There is no proceeding pending or threatened litigation, to the knowledge of management, in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Bancorp or the Bank.

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 June 30, ~~2018.~~2019.

	Total number of shares purchased(1)		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Average price paid per share		Maximum number of shares that may yet be purchased under the plans or programs


Apr 1 - April 30		110	$	34.35		—		—
May 1 - May 31		26,260		33.83		26,260		33.83
June 1 - June 30		83,770		34.29		81,078		34.25
Total		110,140	$	34.18		107,338		34.15		892,662

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

Apr 1 - Apr 30
1,607 $ 39.90 — —
May 1 - May 31
1,753 38.42 — —
June 1 - June 30
10,523 39.94 — —

Total
13,883 $ 39.74 — —

(1)

Activity includes 2,802 shares of stock withheld to pay taxes due upon exercise of stock appreciation rights, vesting of restricted stock, and vesting of performance stock units.

Effective May 22, 2019, Bancorp’s Board of Directors approved a share repurchase program authorizing the repurchase of 1,000,000 shares or approximately 4% of the Company’s total common shares outstanding. Stock repurchases are expected to be made from time to time on the open market or in privately negotiated transactions, subject to applicable securities law. The plan, which will expire in two years unless otherwise extended or completed at an earlier date, does not obligate the Company to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. As of June 30, 2019, Bancorp had 892,662 shares that could be repurchased under its current share repurchase program.

~~(1) Activity represents shares~~There were no equity securities of ~~stock withheld to pay taxes due upon exercise of stock appreciation rights, vesting of restricted stock, and vesting of performance stock units.~~the registrant sold without registration during the quarter covered by this report.

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Item 6. ~~Exhibits~~Exhibits.

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

Exhibit
Number		Description of exhibit
31.1		~~Certifications~~Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act ~~by David P. Heintzman~~
31.2		~~Certifications~~Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act ~~by Nancy B. Davis~~
32		~~Certifications~~Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 902 of the Sarbanes-Oxley Act

101		The following financial statements from the Stock Yards Bancorp, Inc. June 30, ~~2018~~ 2019 Quarterly Report on Form 10-Q, filed on August ~~__, 2018,~~6, 2019, formatted in ~~eXtensible~~ Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL):

(1)

~~(1)~~Consolidated Balance Sheets

~~Consolidated Balance Sheets~~

(2)

Consolidated Statements of Income

(3)

Consolidated Statements of Comprehensive Income

~~(3)~~(4)

Consolidated Statements of ~~Comprehensive Income~~Changes in Stockholders’ Equity

~~(4)~~(5)

Consolidated Statements of ~~Changes in Stockholders’ Equity~~Cash Flows

~~(5)~~(6)

Notes to Consolidated Financial Statements ~~of Cash Flows~~

~~(6)~~

~~Notes to Consolidated Financial Statements~~

7177

Table of Contents

~~Stock Yards Bancorp, inc. and subsidiary~~

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.

(Registrant)
~~Date: August 3, 2018~~	~~By:~~	~~/s/ David P. Heintzman~~	~~David P. Heintzman, Chairman~~ ~~and Chief Executive Officer~~


Date: August ~~3, 2018~~6 , 2019	By:	/s/ James A. Hillebrand
		James A. Hillebrand,
		Chief Executive Officer


Date: August 6 , 2019		/s/ ~~Nancy B. Davis~~ ~~Nancy B. Davis,~~T. Clay Stinnett
		T. Clay Stinnett, Executive Vice President,
		Treasurer and Chief Financial Officer (Principal Financial Officer)

Assets Under Management by Account Type	June 30, 2018				June 30, 2017
	Assets				Assets
(In thousands)	Managed		Non-managed (1)		Managed		Non-managed (1)

Personal trust accounts	$	561,701	$	80,723	$	546,758	$	96,142
Personal individual retirement acounts		360,046		1,802		325,186		7,019
Corporate retirement accounts		49,548		394,067		53,511		364,288
Investment advisory accounts		1,118,499		18,121		952,783		20,787
Foundation and endowment accounts		196,268		-		212,553		-

Total fiduciary accounts	$	2,286,062	$	494,713	$	2,090,791	$	488,236
Custody and safekeeping accounts		-		70,875		-		63,658

Totals	$	2,286,062	$	565,588	$	2,090,791	$	551,894
Total managed and non-managed assets	$	2,851,650			$	2,642,685

Managed Assets by Class of Investment
	As of June 30,
(In thousands)	2018		2017

Interest bearing deposits	$	95,387	$	117,437
US Treasury and government agency obligations		47,574		38,001
State, county and municipal obligations		140,372		134,091
Money market mutual funds		7,670		8,496
Equity mutual funds		580,199		509,785
Other mutual funds - fixed, balanced, and municipal		302,400		308,493
Other notes and bonds		142,123		110,333
Common and preferred stocks		844,004		766,796
Real estate mortgages		361		378
Real estate		51,124		43,974
Other miscellaneous assets (1)		74,848		53,007

Total managed assets	$	2,286,062	$	2,090,791

Fiduciary and Related Services Income
	Three months ended				Six months ended
	June 30,				June 30
(In thousands)	2018		2017		2018		2017

Personal trust accounts	$	1,864	$	1,889	$	3,782	$	3,832
Personal individual retirement accounts		869		807		1,742		1,594
Corporate retirement accounts		361		389		740		788
Investment advisory accounts		2,070		1,828		4,149		3,576
Foundation and endowment accounts		134		133		285		265
Custody and safekeeping acounts		30		47		86		83
Brokerage and insurance services		7		10		30		19
Other		9		50		30		90

Total	$	5,344	$	5,153	$	10,844	$	10,247

(Dollars in thousands)	June 30, 2018			December 31, 2017

Non-accrual loans (1)	$	6,422		$	6,511
Troubled debt restructuring		817			869
Loans past due 90 days or more and still accruing		134			2

Non-performing loans		7,373			7,382

Foreclosed real estate		360			2,640

Non-performing assets	$	7,733		$	10,022

Non-performing loans as a percentage of total loans		0.29	%		0.31	%
Non-performing assets as a percentage of total assets		0.23	%		0.31	%

(In thousands, except per share data)	June 30, 2018			December 31, 2017

Total equity	$	345,515		$	333,644
Less core deposit intangible		(1,139	)		(1,225	)
Less goodwill		(682	)		(682	)
Tangible common equity	$	343,694		$	331,737

Total assets	$	3,323,840		$	3,239,646
Less core deposit intangible		(1,139	)		(1,225	)
Less goodwill		(682	)		(682	)
Total tangible assets	$	3,322,019		$	3,237,739

Total shareholders' equity to total assets		10.40	%		10.30	%
Tangible common equity ratio		10.35			10.25

Number of outstanding shares		22,746			22,679

Book value per share	$	15.19		$	14.71
Tangible common equity per share		15.11			14.63

	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
Apr 1 - Apr 30		1,607	$	39.90		—		—
May 1 - May 31		1,753		38.42		—		—
June 1 - June 30		10,523		39.94		—		—

Total		13,883	$	39.74		—		—