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Derivative Financial Instruments

Periodically, Bancorp enters into an interest rate swap transaction with a borrower, who desires to hedge their 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 consolidated balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition are expected to have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements for the

first

six

months of

2017

were offsetting and therefore had

net effect on Bancorp’s earnings or cash flows.

Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do

not

represent direct credit exposure. Direct credit exposure is limited to the net difference between 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 credit risk of its financial contracts through credit approvals, limits, collateral, and monitoring procedures, and does

not

expect any counterparties to fail their obligations.

June 30, 2017

and

December 31, 2016,

Bancorp had outstanding undesignated interest rate swap contracts as follows:

(dollar amounts in thousands)	Receiving					Paying
	June 30,		December 31,			June 30,			December 31,
	2017		2016			2017			2016
Notional amount	$	47,000	$	43,986		$	47,000		$	43,986
Weighted average maturity (years)		9.7		9.9			9.7			9.9
Fair value	$	-	$	(178	)	$	(13	)	$	178

2016,

Bancorp entered into an interest rate swap to hedge cash flows of a

$10

million rolling fixed-rate

three

-month FHLB borrowing. The swap began

December 6, 2016

and ends

December 6, 2021.

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.

STOCK YARDS BANCORP, INC. AND SUBSIDIARY

The following table details Bancorp’s derivative position designated as a cash flow hedges, and fair values as of

June 30, 2017

and

December 31, 2016.

(dollars in thousands)

							Fair value
Notional		Maturity	Receive (variable)	Pay fixed			assets (liabilities)
amount		date	index	swap rate			June 30, 2017			December 31, 2016
$	10,000	12/6/2021	US 3 Month LIBOR		1.89	%	$	(21	)	$	16
	20,000	12/6/2020	US 3 Month LIBOR		1.79	%		(11	)		9
$	30,000				1.82	%	$	(32	)	$	25