Note 2 - Securities

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

N

OTE

2

– SECURITIES

Securities are classified as available for sale (AFS). AFS securities

may

be sold if needed for liquidity, asset liability management, or other reasons. AFS securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax.

The amortized cost and fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 201 9	(in thousands)
Available for sale
U.S. Government and federal agency	$	22,281	$	196	$	(147	)	$	22,330
Agency mortgage-backed: residential		91,269		1,186		(255	)		92,200
Collateralized loan obligations		49,831		—		(412	)		49,419
State and municipal		27,819		550		(3	)		28,366
Corporate bonds		16,472		213		—			16,685
Total available for sale	$	207,672	$	2,145	$	(817	)	$	209,000

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 201 8	(in thousands)
Available for sale
U.S. Government and federal agency	$	23,280	$	2	$	(722	)	$	22,560
Agency mortgage-backed: residential		87,689		192		(1,891	)		85,990
Collateralized loan obligations		49,942		—		(103	)		49,839
State and municipal		32,841		230		(259	)		32,812
Corporate bonds		9,890		127		(26	)		9,991
Total available for sale	$	203,642	$	551	$	(3,001	)	$	201,192

Sales and calls of securities were as follows:  

	201 9		201 8		201 7
	(in thousands)
Proceeds	$	5,351	$	6,054	$	41,733
Gross gains		1		—		449
Gross losses		6		6		161

The tax provision related to net gains and losses realized on sales was an income tax benefit of

$1,000

for

2019,

an income tax benefit of

$1,000

for

2018,

and income tax expense of

$101,000

for

2017.

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities

may

differ from actual maturities when borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities

not

due at a single maturity date are shown separately.

	December 31, 201 9
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	49,398	$	49,152
One to five years		38,081		38,524
Five to ten years		26,085		26,285
Beyond ten years		2,839		2,839
Agency mortgage-backed: residential		91,269		92,200
Total	$	207,672	$	209,000

Securities pledged at year-end

2019

and

2018

had carrying values of approximately

$75.8

million and

$64.4

million, respectively, and were pledged to secure public deposits.

At

December 31, 2019

and

2018,

the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of

$14.5

million and

$15.3

million, respectively. At year-end

2019,

there were

no

other holdings of securities of any

one

issuer, other than the U.S. Government and its agencies, in an amount greater than

10%

of stockholders’ equity.

The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLO managers are typically large non-bank financial institutions or banks and are typically

$300

million to

$1

billion in size, contain

one hundred

or more loans, have

five

to

six

credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid

first

to the AAA tranche then to the next lower rated tranche. Losses are borne

first

by the equity tranche then by the subsequently higher rated tranche. CLOs

may

be less liquid than government securities from time to time and volatility in the CLO market

may

cause the value of these investments to decline.

The market value of CLOs

may

be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, and prepayments on the underlying loans.

At

December 31, 2019,

$32.9

million and

$16.5

million of our CLOs were AA and A rated, respectively. There were

no

CLOs rated below A and

none

of the CLOs were subject to ratings downgrade in

2019.

All of our CLOs are floating rate, with rates set on a quarterly basis at

three

month LIBOR plus a spread.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company

may

consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of

December 

31,

2019,

management does

not

believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

Securities with unrealized losses at

December 31, 2019

and

December 31, 2018,

aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
201 9
Available for sale
U.S. Government and federal agency	$	12,567	$	(147	)	$	—	$	—		$	12,567	$	(147	)
Agency mortgage-backed: residential		18,457		(97	)		10,665		(158	)		29,122		(255	)
Collateralized loan obligations		9,539		(46	)		35,336		(366	)		44,875		(412	)
State and municipal		911		(3	)		—		—			911		(3	)
Corporate bonds		—		—			—		—			—		—
Total temporarily impaired	$	41,474	$	(293	)	$	46,001	$	(524	)	$	87,475	$	(817	)

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
201 8
Available for sale
U.S. Government and federal agency	$	3,431	$	(57	)	$	17,212	$	(665	)	$	20,643	$	(722	)
Agency mortgage-backed: residential		30,229		(343	)		40,932		(1,548	)		71,161		(1,891	)
Collateralized loan obligations		48,294		(103	)		—		—			48,294		(103	)
State and municipal		6,133		(29	)		7,252		(230	)		13,385		(259	)
Corporate bonds		3,569		(26	)		—		—			3,569		(26	)
Total temporarily impaired	$	91,656	$	(558	)	$	65,396	$	(2,443	)	$	157,052	$	(3,001	)