Note 2 - Securities

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

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

Note

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
	(in thousands)
March 31, 20 20
Available for sale
U.S. Government and federal agency	$	20,751	$	353	$	—		$	21,104
Agency mortgage-backed: residential		86,840		2,428		(167	)		89,101
Collateralized loan obligations		44,732		—		(3,978	)		40,754
State and municipal		28,301		346		(493	)		28,154
Corporate bonds		20,831		199		(1,486	)		19,544
Total available for sale	$	201,455	$	3,326	$	(6,124	)	$	198,657

December 31, 201 9	Amortized Cost		Gross Unre alized Gains		Gross Unre alized Losses			Fair Value
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

Sales and calls of securities were as follows:

	Three Months Ended March 31,
	20 20		201 9
	(in thousands)
Proceeds	$	6,000	$	1,000
Gross gains		—		—
Gross losses		—		—

The amortized cost and fair value of our 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.  

	March 31 , 20 20
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	31,403	$	30,003
One to five years		40,037		40,515
Five to ten years		23,970		22,852
Beyond ten years		19,205		16,186
Agency mortgage-backed: residential		86,840		89,101
Total	$	201,455	$	198,657

Securities pledged at

March 31, 2020

and

December 31, 2019

had carrying values of approximately

$80.9

million and

$75.8

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

At

March 31, 2020

and

December 31, 2019,

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

$17.0

million and

$14.5

million, respectively. At

March 31, 2020

and

December 31, 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. CLOs are typically managed by 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, prepayments on the underlying loans, and other conditions or economic factors.

At

March 31, 2020,

$25.7

million and

$15.0

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 the

three

months ended

March 31, 2020.

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

three

-month LIBOR plus a spread. Stress testing was completed on each security in the CLO portfolio as of

March 31, 2020.

Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a

ten

percent per annum constant prepayment rate, a

twelve

percent per annum constant default rate for

four

years followed by a

four

percent rate thereafter, and a

forty-five

percent recovery rate on a

one

-year lag.

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

March 

31,

2020,

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

March 31, 2020

and

December 31, 2019,

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)
March 31, 20 20
Available for sale
U.S. Government and federal agency	$	—	$	—		$	—	$	—		$	—	$	—
Agency mortgage-backed: residential		10,843		(120	)		1,617		(47	)		12,460		(167	)
Collateralized loan obligations		10,702		(843	)		30,052		(3,135	)		40,754		(3,978	)
State and municipal		10,192		(493	)		—		—			10,192		(493	)
Corporate bonds		11,008		(1,486	)		—		—			11,008		(1,486	)
Total temporarily impaired	$	42,745	$	(2,942	)	$	31,669	$	(3,182	)	$	74,414	$	(6,124	)
December 31, 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	)