(3)

Loans

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

(in thousands)	June 30, 2016		December 31, 2015
Commercial and industrial	$	721,956	$	644,398
Construction and development, excluding undeveloped land		136,029		134,482
Undeveloped land		20,342		21,185

Real estate mortgage:
Commercial investment		572,438		528,290
Owner occupied commercial		333,862		329,365
1-4 family residential		240,770		226,575
Home equity - first lien		52,360		50,115
Home equity - junior lien		65,999		63,066
Subtotal: Real estate mortgage		1,265,429		1,197,411

Consumer		31,795		35,531

Total loans	$	2,175,551	$	2,033,007

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, 2016 and December 31, 2015.

(in thousands)	Type of loan
			Construction
			and development
	Commercial		excluding
	and		undeveloped		Undeveloped		Real estate
June 30, 2016	industrial		land		land		mortgage		Consumer		Total

Loans	$	721,956	$	136,029	$	20,342	$	1,265,429	$	31,795	$	2,175,551

Loans collectively evaluated for impairment	$	719,158	$	135,712	$	20,342	$	1,261,808	$	31,701	$	2,168,721

Loans individually evaluated for impairment	$	2,751	$	-	$	-	$	3,145	$	94	$	5,990

Loans acquired with deteriorated credit quality	$	47	$	317	$	-	$	476	$	-	$	840

				Construction
				and development
	Commercial			excluding
	and			undeveloped		Undeveloped		Real estate
	industrial			land		land		mortgage			Consumer			Total
Allowance for loan losses
At December 31, 2015	$	8,645		$	1,760	$	814	$	10,875		$	347		$	22,441
Provision (credit)		1,602			180		46		(644	)		66			1,250
Charge-offs		(484	)		-		-		(361	)		(249	)		(1,094	)
Recoveries		127			10		-		207			200			544
At June 30, 2016	$	9,890		$	1,950	$	860	$	10,077		$	364		$	23,141

Allowance for loans collectively evaluated for impairment	$	9,604		$	1,950	$	860	$	10,070		$	301		$	22,785

Allowance for loans individually evaluated for impairment	$	286		$	-	$	-	$	7		$	63		$	356

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

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

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

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

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

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

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

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

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

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

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

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

●

Commercial and industrial loans: Loans in this category are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A decline in the strength of the business or a weakened economy and resultant decreased consumer and/or business spending may have an effect on the credit quality in this loan category.

●

Construction and development, excluding undeveloped land: Loans in this category primarily include owner-occupied and investment construction loans and commercial development projects. In most cases, construction loans require only interest to be paid during construction. Upon completion or stabilization, the construction loan may convert to permanent financing in the real estate mortgage segment, requiring principal amortization. Repayment of development loans is derived from sale of lots or units including any pre-sold units. Credit risk is affected by construction delays, cost overruns, market conditions and availability of permanent financing, to the extent such permanent financing is not being provided by Bancorp.

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 affected by market conditions and time to sell lots at an adequate price. Credit risk is also affected by availability of permanent financing, to the extent such permanent financing is not being provided by Bancorp.

●

Real estate mortgage: Loans in this category are made to and secured by owner-occupied residential real estate, owner-occupied real estate used for business purposes, and income-producing investment properties. For owner occupied residential and commercial real estate, repayment is dependent on financial strength of the borrower. For income-producing investment properties, repayment is dependent on financial strength of tenants in addition to the borrower. Underlying properties are generally located in Bancorp's primary market area. Cash flows of income producing investment properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, could have an effect on credit quality. Overall health of the economy, including unemployment rates and real estate prices, has an effect on credit quality in this loan category.

●

Consumer: Loans in this category may be either secured or unsecured and repayment is dependent on credit quality of the individual borrower and, if applicable, adequacy of collateral securing the loan. Therefore, overall health of the economy, including unemployment rates and stock prices, will have a significant effect on credit quality in this loan category.

Bancorp has loans that were acquired in the 2013 acquisition, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable that all contractually required payments would not be collected. The carrying amount of those loans is included in the balance sheet amounts of loans at June 30, 2016 and December 31, 2015. Changes in the fair value adjustment for acquired impaired loans are shown in the following table:

(in thousands)	Accretable discount			Non-accretable discount
Balance at December 31, 2014	$	62		$	266

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

Accretion		(3	)		-
Reclassifications from (to) non-accretable discount		-			-
Disposals		-			-
Balance at June 30, 2016	$	-		$	189

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

The following table presents loans individually evaluated for impairment as of June 30, 2016 and December 31, 2015.

(in thousands)			Unpaid				Average
	Recorded		principal		Related		recorded
June 30, 2016	investment		balance		allowance		investment

Loans with no related allowance recorded:
Commercial and industrial	$	1,753	$	2,321	$	-	$	2,805
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		280		280		-		254
Owner occupied commercial		1,241		1,678		-		1,559
1-4 family residential		977		977		-		999
Home equity - first lien		-		-		-		4
Home equity - junior lien		253		253		-		211
Subtotal: Real estate mortgage		2,751		3,188		-		3,027

Consumer		31		31		-		21
Subtotal	$	4,535	$	5,540	$	-	$	5,853

Loans with an allowance recorded:
Commercial and industrial	$	998	$	1,473	$	286	$	1,206
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		-

Real estate mortgage
Commercial investment		-		-		-		-
Owner occupied commercial		394		394		7		761
1-4 family residential		-		-		-		-
Home equity - first lien		-		-		-		-
Home equity - junior lien		-		-		-		-
Subtotal: Real estate mortgage		394		394		7		761

Consumer		63		63		63		66
Subtotal	$	1,455	$	1,930	$	356	$	2,033

Total:
Commercial and industrial	$	2,751	$	3,794	$	286	$	4,011
Construction and development, excluding undeveloped land		-		-		-		-
Undeveloped land		-		-		-		-

Real estate mortgage		-		-		-		-
Commercial investment		280		280		-		254
Owner occupied commercial		1,635		2,072		7		2,320
1-4 family residential		977		977		-		999
Home equity - first lien		-		-		-		4
Home equity - junior lien		253		253		-		211
Subtotal: Real estate mortgage		3,145		3,582		7		3,788

Consumer		94		94		63		87
Total	$	5,990	$	7,470	$	356	$	7,886

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

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

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

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

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

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

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

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

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

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

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

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

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

Impaired loans include non-accrual loans and accruing loans accounted for as troubled debt restructurings (TDR), which continue to accrue interest. Non-performing loans include the balance of impaired loans plus any loans over 90 days past due and still accruing interest. Bancorp had loans past due more than 90 days and still accruing interest totaling $410 thousand at June 30, 2016, compared with $176 thousand at December 31, 2015.

The following table presents the recorded investment in non-accrual loans as of June 30, 2016 and December 31, 2015.

(in thousands)	June 30, 2016		December 31, 2015

Commercial and industrial	$	1,794	$	3,643
Construction and development, excluding undeveloped land		-		-
Undeveloped land		-		-

Real estate mortgage
Commercial investment		280		278
Owner occupied commercial		1,635		2,761
1-4 family residential		977		906
Home equity - first lien		-		13
Home equity - junior lien		253		92
Subtotal: Real estate mortgage		3,145		4,050

Consumer		31		-

Total	$	4,970	$	7,693

At June 30, 2016 and December 31, 2015, Bancorp had $1.0 million and $1.1 million of accruing loans classified as TDR, respectively. Bancorp did not modify and classify any additional loans as TDR during the three or six month periods ended June 30, 2016 or 2015.

Bancorp did not have any loans accounted for as TDR that were restructured and experienced a subsequent payment default during the three and twelve month periods ended June 30, 2016 or 2015. Loans accounted for as TDR include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. Loans accounted for as TDR, which have not defaulted, are individually evaluated for impairment and, at June 30, 2016, had a total allowance allocation of $319 thousand, compared with $177 thousand at December 31, 2015.

At June 30, 2016 and December 31, 2015, Bancorp did not have any outstanding commitments to lend additional funds to borrowers whose loans have been modified as TDR.

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

The following table presents the aging of the recorded investment in loans as of June 30, 2016 and December 31, 2015.

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

Commercial and industrial	$	587	$	96	$	1,794	$	2,477	$	719,479	$	721,956	$	-
Construction and development, excluding undeveloped land		-		-		-		-		136,029		136,029		-
Undeveloped land		-		-		-		-		20,342		20,342		-

Real estate mortgage
Commercial investment		-		200		420		620		571,818		572,438		140
Owner occupied commercial		1,367		734		1,836		3,937		329,925		333,862		201
1-4 family residential		1,428		227		1,046		2,701		238,069		240,770		69
Home equity - first lien		78		25		-		103		52,257		52,360		-
Home equity - junior lien		79		259		253		591		65,408		65,999		-
Subtotal: Real estate mortgage		2,952		1,445		3,555		7,952		1,257,477		1,265,429		410

Consumer		-		-		31		31		31,764		31,795		-

Total	$	3,539	$	1,541	$	5,380	$	10,460	$	2,165,091	$	2,175,551	$	410

December 31, 2015

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

Real estate mortgage
Commercial investment		290		140		278		708		527,582		528,290		-
Owner occupied commercial		-		-		2,761		2,761		326,604		329,365		-
1-4 family residential		1,147		94		1,082		2,323		224,252		226,575		176
Home equity - first lien		35		51		13		99		50,016		50,115		-
Home equity - junior lien		285		173		92		550		62,516		63,066		-
Subtotal: Real estate mortgage		1,757		458		4,226		6,441		1,190,970		1,197,411		176

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

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

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

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

●

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

●

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

●

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

●

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

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

As of June 30, 2016 and December 31, 2015, the internally assigned risk grades of loans by category were as follows:

(in thousands)							Substandard				Total
June 30, 2016	Pass		OAEM		Substandard		non-performing		Doubtful		loans

Commercial and industrial	$	693,830	$	18,929	$	6,446	$	2,751	$	-	$	721,956
Construction and development, excluding undeveloped land		134,823		-		1,206		-		-		136,029
Undeveloped land		19,681		-		661		-		-		20,342

Real estate mortgage
Commercial investment		570,100		1,918		-		420		-		572,438
Owner occupied commercial		321,684		8,452		1,890		1,836		-		333,862
1-4 family residential		239,429		295		-		1,046		-		240,770
Home equity - first lien		52,360		-		-		-		-		52,360
Home equity - junior lien		65,696		50		-		253		-		65,999
Subtotal: Real estate mortgage		1,249,269		10,715		1,890		3,555		-		1,265,429

Consumer		31,701		-		-		94		-		31,795

Total	$	2,129,304	$	29,644	$	10,203	$	6,400	$	-	$	2,175,551


December 31, 2015

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

Real estate mortgage
Commercial investment		525,829		2,183		-		278		-		528,290
Owner occupied commercial		306,056		17,135		3,413		2,761		-		329,365
1-4 family residential		224,645		848		-		1,082		-		226,575
Home equity - first lien		50,102		-		-		13		-		50,115
Home equity - junior lien		62,924		50		-		92		-		63,066
Subtotal: Real estate mortgage		1,169,556		20,216		3,413		4,226		-		1,197,411

Consumer		35,463		-		-		68		-		35,531

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