UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedSeptember 30, 20172019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.000-53869 001-38408
FNCB BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania | 23-2900790 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
102 E. Drinker St., Dunmore, PA | 18512 | |
(Address of Principal Executive Offices) | (Zip Code) |
(570) 346-7667
Registrant’sRegistrant’s telephone number, including area code (570) 346-7667
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, $1.25 par value | FNCB | Nasdaq Capital Market |
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(§ 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,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large | Accelerated | |
Non-accelerated filer ☐ | ||
| Smaller reporting company | |
Emerging growth |
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). YesYES ☐ NoNO ☒
Indicate the number of shares outstanding of each of the issuer’sissuer’s classes of common stock as of the latest practicable date:20,170,532 shares as of November 5, 2019
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3 | |
3 | |
3 | |
4 | |
(Loss) | 5 |
Consolidated Statements of Changes in | 6 |
7 | |
8 | |
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Item 3. | |
Proceedings. | |
Factors. | |
Item 2. Unregistered Sales of Equity Securities and Use of | |
Securities. | |
Disclosures. | |
Information. | |
Exhibits. |
Part I - Financial Information
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | |||||||
(unaudited) |
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(in thousands, except share data) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Cash and due from banks | $ | 24,881 | $ | 20,562 | $ | 30,900 | $ | 26,673 | ||||||||
Interest-bearing deposits in other banks | 18,929 | 91,883 | 6,611 | 9,808 | ||||||||||||
Total cash and cash equivalents | 43,810 | 112,445 | 37,511 | 36,481 | ||||||||||||
Securities available for sale, at fair value | 282,037 | 276,015 | ||||||||||||||
Stock in Federal Home Loan Bank of Pittsburgh, at cost | 2,450 | 3,311 | ||||||||||||||
Available-for-sale debt securities, at fair value | 254,666 | 296,032 | ||||||||||||||
Equity securities, at fair value | 922 | 891 | ||||||||||||||
Restricted stock, at cost | 4,194 | 3,123 | ||||||||||||||
Loans held for sale | 147 | 596 | 1,140 | 820 | ||||||||||||
Loans, net of allowance for loan and lease losses of $8,862 and $8,419 | 750,627 | 722,860 | ||||||||||||||
Loans, net of allowance for loan and lease losses of $9,315 and $9,519 | 827,562 | 829,581 | ||||||||||||||
Bank premises and equipment, net | 10,482 | 10,784 | 17,274 | 14,425 | ||||||||||||
Accrued interest receivable | 3,203 | 2,757 | 3,038 | 3,614 | ||||||||||||
Bank-owned life insurance | 30,332 | 29,933 | 31,104 | 31,015 | ||||||||||||
Other real estate owned | 1,088 | 2,048 | 412 | 919 | ||||||||||||
Net deferred tax assets | 23,507 | 26,875 | 6,691 | 10,693 | ||||||||||||
Other assets | 9,428 | 7,975 | 12,676 | 10,138 | ||||||||||||
Total assets | $ | 1,157,111 | $ | 1,195,599 | $ | 1,197,190 | $ | 1,237,732 | ||||||||
Liabilities | ||||||||||||||||
Deposits: | ||||||||||||||||
Demand (non-interest-bearing) | $ | 162,426 | $ | 173,702 | $ | 179,025 | $ | 156,600 | ||||||||
Interest-bearing | 820,786 | 841,437 | 785,035 | 939,029 | ||||||||||||
Total deposits | 983,212 | 1,015,139 | 964,060 | 1,095,629 | ||||||||||||
Borrowed funds: | ||||||||||||||||
Federal Home Loan Bank of Pittsburgh advances | 45,350 | 58,537 | 79,458 | 18,930 | ||||||||||||
Subordinated debentures | 5,000 | 10,000 | - | 5,000 | ||||||||||||
Junior subordinated debentures | 10,310 | 10,310 | 10,310 | 10,310 | ||||||||||||
Total borrowed funds | 60,660 | 78,847 | 89,768 | 34,240 | ||||||||||||
Accrued interest payable | 244 | 242 | 401 | 338 | ||||||||||||
Other liabilities | 15,513 | 11,000 | 10,394 | 10,306 | ||||||||||||
Total liabilities | 1,059,629 | 1,105,228 | $ | 1,064,623 | $ | 1,140,513 | ||||||||||
Shareholders' equity | ||||||||||||||||
Preferred stock ($1.25 par) | ||||||||||||||||
Authorized: 20,000,000 shares at September 30, 2017 and December 31, 2016 | ||||||||||||||||
Issued and outstanding: 0 shares at September 30, 2017 and December 31, 2016 | - | - | ||||||||||||||
Common stock ($1.25 par) | ||||||||||||||||
Authorized: 50,000,000 shares at September 30, 2017 and December 31, 2016 | ||||||||||||||||
Issued and outstanding: 16,757,963 shares at September 30, 2017 and 16,645,845 shares at December 31, 2016 | 20,947 | 20,807 | ||||||||||||||
Preferred shares ($1.25 par) | ||||||||||||||||
Authorized: 20,000,000 shares at September 30, 2019 and December 31, 2018 | ||||||||||||||||
Issued and outstanding: 0 shares at September 30, 2019 and December 31, 2018 | - | - | ||||||||||||||
Common shares ($1.25 par) | ||||||||||||||||
Authorized: 50,000,000 shares at September 30, 2019 and December 31, 2018 | ||||||||||||||||
Issued and outstanding: 20,169,492 shares at September 30, 2019 and 16,821,371 shares at December 31, 2018 | 25,211 | 21,026 | ||||||||||||||
Additional paid-in capital | 63,143 | 62,593 | 81,058 | 63,547 | ||||||||||||
Retained earnings | 13,282 | 8,531 | 21,733 | 17,186 | ||||||||||||
Accumulated other comprehensive income (loss) | 110 | (1,560 | ) | 4,565 | (4,540 | ) | ||||||||||
Total shareholders' equity | 97,482 | 90,371 | 132,567 | 97,219 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 1,157,111 | $ | 1,195,599 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 1,197,190 | $ | 1,237,732 |
The accompanying notes to consolidated financial statements are an integral part of these statements. |
CONSOLIDATED STATEMENTS OF INCOME | |||||||
(unaudited) |
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands, except share data) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
Interest income | ||||||||||||||||||||||||||||||||
Interest and fees on loans | $ | 7,576 | $ | 7,098 | $ | 21,748 | $ | 20,984 | $ | 9,488 | $ | 9,501 | $ | 28,313 | $ | 26,820 | ||||||||||||||||
Interest and dividends on securities: | ||||||||||||||||||||||||||||||||
U.S. government agencies | 816 | 848 | 2,566 | 2,678 | 924 | 899 | 2,723 | 2,675 | ||||||||||||||||||||||||
State and political subdivisions, tax-free | 7 | 9 | 42 | 30 | ||||||||||||||||||||||||||||
State and political subdivisions, tax free | 37 | 37 | 112 | 95 | ||||||||||||||||||||||||||||
State and political subdivisions, taxable | 1,016 | 675 | 2,816 | 1,834 | 713 | 1,028 | 2,545 | 3,079 | ||||||||||||||||||||||||
Other securities | 166 | 127 | 409 | 432 | 314 | 211 | 729 | 646 | ||||||||||||||||||||||||
Total interest and dividends on securities | 2,005 | 1,659 | 5,833 | 4,974 | 1,988 | 2,175 | 6,109 | 6,495 | ||||||||||||||||||||||||
Interest on interest-bearing deposits in other banks | 24 | 8 | 146 | 14 | 30 | 17 | 155 | 52 | ||||||||||||||||||||||||
Total interest income | 9,605 | 8,765 | 27,727 | 25,972 | 11,506 | 11,693 | 34,577 | 33,367 | ||||||||||||||||||||||||
Interest expense | ||||||||||||||||||||||||||||||||
Interest on deposits | 943 | 704 | 2,513 | 2,009 | 1,901 | 1,559 | 6,283 | 3,760 | ||||||||||||||||||||||||
Interest on borrowed funds: | ||||||||||||||||||||||||||||||||
Interest on Federal Home Loan Bank of Pittsburgh advances | 163 | 157 | 424 | 472 | 448 | 715 | 988 | 1,774 | ||||||||||||||||||||||||
Interest on subordinated debentures | 97 | 162 | 323 | 480 | - | 58 | 24 | 171 | ||||||||||||||||||||||||
Interest on junior subordinated debentures | 77 | 62 | 219 | 180 | 106 | 106 | 331 | 292 | ||||||||||||||||||||||||
Total interest on borrowed funds | 337 | 381 | 966 | 1,132 | 554 | 879 | 1,343 | 2,237 | ||||||||||||||||||||||||
Total interest expense | 1,280 | 1,085 | 3,479 | 3,141 | 2,455 | 2,438 | 7,626 | 5,997 | ||||||||||||||||||||||||
Net interest income before provision (credit) for loan and lease losses | 8,325 | 7,680 | 24,248 | 22,831 | ||||||||||||||||||||||||||||
Provision (credit) for loan and lease losses | 543 | (234 | ) | 486 | 858 | |||||||||||||||||||||||||||
Net interest income after provision (credit) for loan and lease losses | 7,782 | 7,914 | 23,762 | 21,973 | ||||||||||||||||||||||||||||
Net interest income before provision for loan and lease losses | 9,051 | 9,255 | 26,951 | 27,370 | ||||||||||||||||||||||||||||
Provision for loan and lease losses | 637 | 1,149 | 830 | 2,749 | ||||||||||||||||||||||||||||
Net interest income after provision for loan and lease losses | 8,414 | 8,106 | 26,121 | 24,621 | ||||||||||||||||||||||||||||
Non-interest income | ||||||||||||||||||||||||||||||||
Deposit service charges | 728 | 739 | 2,147 | 2,157 | 797 | 711 | 2,203 | 2,160 | ||||||||||||||||||||||||
Net gain on the sale of available-for-sale securities | 367 | - | 1,338 | 960 | ||||||||||||||||||||||||||||
Net gain (loss) on the sale of available-for-sale debt securities | 379 | - | 702 | (4 | ) | |||||||||||||||||||||||||||
Net gain (loss) on equity securities | 5 | (8 | ) | 31 | (34 | ) | ||||||||||||||||||||||||||
Net gain on the sale of mortgage loans held for sale | 106 | 99 | 241 | 238 | 69 | 71 | 198 | 171 | ||||||||||||||||||||||||
Net gain on the sale of SBA guaranteed loans | 23 | 51 | 79 | 51 | - | - | - | 322 | ||||||||||||||||||||||||
Net gain on the sale of other repossessed assets | - | - | 47 | - | ||||||||||||||||||||||||||||
Net gain on the sale of other real estate owned | - | 32 | 57 | 29 | 11 | - | 20 | 31 | ||||||||||||||||||||||||
Loan-related fees | 96 | 85 | 252 | 287 | 80 | 85 | 231 | 245 | ||||||||||||||||||||||||
Income from bank-owned life insurance | 129 | 137 | 399 | 426 | 134 | 141 | 394 | 413 | ||||||||||||||||||||||||
Merchant services revenue | 142 | 135 | 391 | 365 | ||||||||||||||||||||||||||||
Other | 265 | 237 | 747 | 657 | 214 | 185 | 754 | 699 | ||||||||||||||||||||||||
Total non-interest income | 1,714 | 1,380 | 5,307 | 4,805 | 1,831 | 1,320 | 4,924 | 4,368 | ||||||||||||||||||||||||
Non-interest expense | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | 3,247 | 3,263 | 10,069 | 10,366 | 3,911 | 3,581 | 11,634 | 10,732 | ||||||||||||||||||||||||
Occupancy expense | 394 | 479 | 1,567 | 1,301 | 460 | 500 | 1,454 | 1,629 | ||||||||||||||||||||||||
Equipment expense | 474 | 429 | 1,380 | 1,277 | 332 | 299 | 968 | 936 | ||||||||||||||||||||||||
Advertising expense | 119 | 157 | 424 | 422 | 228 | 193 | 579 | 519 | ||||||||||||||||||||||||
Data processing expense | 506 | 505 | 1,502 | 1,522 | 742 | 745 | 2,312 | 2,040 | ||||||||||||||||||||||||
Regulatory assessments | 160 | 199 | 497 | 629 | 21 | 251 | 265 | 648 | ||||||||||||||||||||||||
Bank shares tax | 252 | 253 | 762 | 746 | 205 | 278 | 760 | 767 | ||||||||||||||||||||||||
Expense of other real estate owned | 104 | 95 | 432 | 335 | 62 | 91 | 127 | 191 | ||||||||||||||||||||||||
Legal expense | 23 | 79 | 115 | 285 | ||||||||||||||||||||||||||||
Professional fees | 206 | 157 | 662 | 716 | 189 | 241 | 724 | 733 | ||||||||||||||||||||||||
Insurance expense | 132 | 131 | 385 | 384 | 128 | 130 | 374 | 398 | ||||||||||||||||||||||||
Directors fees | 236 | 85 | 405 | 256 | ||||||||||||||||||||||||||||
Other losses | 49 | 67 | 334 | 234 | 16 | 28 | 26 | 155 | ||||||||||||||||||||||||
Other operating expenses | 731 | 739 | 2,136 | 2,165 | 799 | 766 | 2,248 | 2,382 | ||||||||||||||||||||||||
Total non-interest expense | 6,397 | 6,553 | 20,265 | 20,382 | 7,329 | 7,188 | 21,876 | 21,386 | ||||||||||||||||||||||||
Income before income tax expense | 3,099 | 2,741 | 8,804 | 6,396 | 2,916 | 2,238 | 9,169 | 7,603 | ||||||||||||||||||||||||
Income tax expense | 827 | 724 | 2,543 | 1,611 | 513 | 388 | 1,582 | 1,322 | ||||||||||||||||||||||||
Net income | $ | 2,272 | $ | 2,017 | $ | 6,261 | $ | 4,785 | $ | 2,403 | $ | 1,850 | $ | 7,587 | $ | 6,281 | ||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.14 | $ | 0.12 | $ | 0.37 | $ | 0.29 | $ | 0.12 | $ | 0.11 | $ | 0.39 | $ | 0.37 | ||||||||||||||||
Diluted | $ | 0.14 | $ | 0.12 | $ | 0.37 | $ | 0.29 | $ | 0.12 | $ | 0.11 | $ | 0.39 | $ | 0.37 | ||||||||||||||||
Cash dividends declared per common share | $ | 0.03 | $ | 0.02 | $ | 0.09 | $ | 0.06 | $ | 0.05 | $ | 0.04 | $ | 0.15 | $ | 0.12 | ||||||||||||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | ||||||||||||||||||||||||||||||||
Basic | 16,757,963 | 16,593,811 | 16,711,172 | 16,554,391 | 20,168,529 | 16,818,625 | 19,678,031 | 16,791,815 | ||||||||||||||||||||||||
Diluted | 16,777,671 | 16,593,811 | 16,728,852 | 16,556,154 | 20,172,282 | 16,838,547 | 19,683,522 | 16,813,948 |
The accompanying notes to consolidated financial statements are an integral part of these statements. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||
(unaudited) |
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
Net income | $ | 2,272 | $ | 2,017 | $ | 6,261 | $ | 4,785 | $ | 2,403 | $ | 1,850 | $ | 7,587 | $ | 6,281 | ||||||||||||||||
Other comprehensive (loss) income: | ||||||||||||||||||||||||||||||||
Unrealized (losses) gains on securities available for sale | (1,290 | ) | (1,199 | ) | 3,868 | 10,495 | ||||||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Unrealized gains (losses) on available-for-sale debt securities | 1,964 | (2,302 | ) | 12,227 | (9,118 | ) | ||||||||||||||||||||||||||
Taxes | 439 | 408 | (1,315 | ) | (3,568 | ) | (412 | ) | 483 | (2,567 | ) | 1,914 | ||||||||||||||||||||
Net of tax amount | (851 | ) | (791 | ) | 2,553 | 6,927 | 1,552 | (1,819 | ) | 9,660 | (7,204 | ) | ||||||||||||||||||||
Reclassification adjustment for gains included in net income | (367 | ) | - | (1,338 | ) | (960 | ) | |||||||||||||||||||||||||
Reclassification adjustment for (gains) losses included in net income | (379 | ) | - | (702 | ) | 4 | ||||||||||||||||||||||||||
Taxes | 125 | - | 455 | 326 | 79 | - | 147 | (1 | ) | |||||||||||||||||||||||
Net of tax amount | (242 | ) | - | (883 | ) | (634 | ) | (300 | ) | - | (555 | ) | 3 | |||||||||||||||||||
Total other comprehensive (loss) income | (1,093 | ) | (791 | ) | 1,670 | 6,293 | ||||||||||||||||||||||||||
Total other comprehensive income (loss) | 1,252 | (1,819 | ) | 9,105 | (7,201 | ) | ||||||||||||||||||||||||||
Comprehensive income | $ | 1,179 | $ | 1,226 | $ | 7,931 | $ | 11,078 | ||||||||||||||||||||||||
Comprehensive income (loss) | $ | 3,655 | $ | 31 | $ | 16,692 | $ | (920 | ) |
The accompanying notes to consolidated financial statements are an integral part of these statements. |
CONSOLIDATED STATEMENTS OF CHANGES IN | |||||||||||||||
For the Nine Months Ended September 30, | |||||||||||||||
(unaudited) |
Accumulated | ||||||||||||||||||||||||
Number | Additional | Other | Total | |||||||||||||||||||||
of Common | Common | Paid-in | Retained | Comprehensive | Shareholders' | |||||||||||||||||||
(in thousands, except share data) | Shares | Stock | Capital | Earnings | (Loss) Income | Equity | ||||||||||||||||||
Balances, December 31, 2015 | 16,514,245 | $ | 20,643 | $ | 62,059 | $ | 3,714 | $ | (61 | ) | $ | 86,355 | ||||||||||||
Net income for the period | - | - | - | 4,785 | - | 4,785 | ||||||||||||||||||
Cash dividends declared, $0.06 per share | - | - | - | (993 | ) | - | (993 | ) | ||||||||||||||||
Common shares issued under long-term incentive compensation plan | 52,848 | 66 | (66 | ) | - | - | - | |||||||||||||||||
Restricted stock awards | - | - | 195 | - | - | 195 | ||||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 47,763 | 59 | 193 | - | - | 252 | ||||||||||||||||||
Other comprehensive income, net of tax of $3,242 | - | - | - | - | 6,293 | 6,293 | ||||||||||||||||||
Balances, September 30, 2016 | 16,614,856 | $ | 20,768 | $ | 62,381 | $ | 7,506 | $ | 6,232 | $ | 96,887 | |||||||||||||
Balances, December 31, 2016 | 16,645,845 | $ | 20,807 | $ | 62,593 | $ | 8,531 | $ | (1,560 | ) | $ | 90,371 | ||||||||||||
Net income for the period | - | - | - | 6,261 | - | 6,261 | ||||||||||||||||||
Cash dividends declared, $0.09 per share | - | - | - | (1,505 | ) | - | (1,505 | ) | ||||||||||||||||
Common shares issued under long-term incentive compensation plan | 46,878 | 58 | (58 | ) | - | - | - | |||||||||||||||||
Restricted stock awards | - | - | 234 | - | - | 234 | ||||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 65,240 | 82 | 374 | (5 | ) | - | 451 | |||||||||||||||||
Other comprehensive income, net of tax of $860 | - | - | - | - | 1,670 | 1,670 | ||||||||||||||||||
Balances, September 30, 2017 | 16,757,963 | $ | 20,947 | $ | 63,143 | $ | 13,282 | $ | 110 | $ | 97,482 |
(in thousands, except per share data) | Number of Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total Shareholders' Equity | ||||||||||||||||||
Balances, December 31, 2017 | 16,757,963 | $ | 20,947 | $ | 63,210 | $ | 6,779 | $ | (1,745 | ) | $ | 89,191 | ||||||||||||
Net income for the period | - | - | - | 2,019 | - | 2,019 | ||||||||||||||||||
Cash dividends paid, $0.04 per share | - | - | - | (671 | ) | - | (671 | ) | ||||||||||||||||
Reclassification of unrealized loss on equity securities, net of tax | - | - | - | (65 | ) | 65 | - | |||||||||||||||||
Restricted stock awards | - | - | 72 | - | - | 72 | ||||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 8,637 | 11 | 53 | (5 | ) | - | 59 | |||||||||||||||||
Other comprehensive loss, net of tax of $1,044 | - | - | - | - | (3,932 | ) | (3,932 | ) | ||||||||||||||||
Balances, March 31, 2018 | 16,766,600 | 20,958 | 63,335 | 8,057 | (5,612 | ) | 86,738 | |||||||||||||||||
Net income for the period | - | - | - | 2,412 | - | 2,412 | ||||||||||||||||||
Cash dividends paid, $0.04 per share | - | - | - | (672 | ) | - | (672 | ) | ||||||||||||||||
Reclassification of unrealized loss on equity securities, net of tax | - | - | - | - | - | - | ||||||||||||||||||
Restricted stock awards | - | - | 65 | - | - | 65 | ||||||||||||||||||
Common shares issued under long-term incentive compensation plan | 46,358 | 58 | (58 | ) | - | - | - | |||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 4,139 | 5 | 32 | (5 | ) | - | 32 | |||||||||||||||||
Other comprehensive loss, net of tax of $386 | - | - | - | - | (1,450 | ) | (1,450 | ) | ||||||||||||||||
Balances, June 30, 2018 | 16,817,097 | 21,021 | 63,374 | 9,792 | (7,062 | ) | 87,125 | |||||||||||||||||
Net income for the period | - | - | - | 1,850 | - | 1,850 | ||||||||||||||||||
Cash dividends paid, $0.04 per share | - | - | - | (673 | ) | - | (673 | ) | ||||||||||||||||
Reclassification of unrealized loss on equity securities, net of tax | - | - | - | - | - | - | ||||||||||||||||||
Restricted stock awards | - | - | 78 | - | - | 78 | ||||||||||||||||||
Common shares issued under long-term incentive compensation plan | - | - | - | - | - | - | ||||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 2,374 | 3 | 17 | (4 | ) | - | 16 | |||||||||||||||||
Other comprehensive loss, net of tax of $483 | - | - | - | - | (1,819 | ) | (1,819 | ) | ||||||||||||||||
Balances, September 30, 2018 | 16,819,471 | $ | 21,024 | $ | 63,469 | $ | 10,965 | $ | (8,881 | ) | $ | 86,577 | ||||||||||||
Balances, December 31, 2018 | 16,821,371 | $ | 21,026 | $ | 63,547 | $ | 17,186 | $ | (4,540 | ) | $ | 97,219 | ||||||||||||
Net income for the period | - | - | - | 2,635 | - | 2,635 | ||||||||||||||||||
Cash dividends paid, $0.05 per share | - | - | - | (1,006 | ) | - | (1,006 | ) | ||||||||||||||||
Common shares issued for capital raise, net | 3,285,550 | 4,107 | 17,201 | - | - | 21,308 | ||||||||||||||||||
Restricted stock awards | - | - | 67 | - | - | 67 | ||||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 1,639 | 2 | 12 | (6 | ) | - | 8 | |||||||||||||||||
Other comprehensive income, net of tax of $944 | - | - | - | - | 3,551 | 3,551 | ||||||||||||||||||
Balances, March 31, 2019 | 20,108,560 | 25,135 | 80,827 | 18,809 | (989 | ) | 123,782 | |||||||||||||||||
Net income for the period | - | - | - | 2,549 | - | 2,549 | ||||||||||||||||||
Cash dividends paid, $0.05 per share | - | - | - | (1,007 | ) | - | (1,007 | ) | ||||||||||||||||
Common shares issued for capital raise, net | - | - | - | - | - | - | ||||||||||||||||||
Restricted stock awards | - | - | 73 | - | - | 73 | ||||||||||||||||||
Common shares issued under long-term incentive compensation plan | 37,558 | 47 | (47 | ) | - | - | - | |||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 1,899 | 2 | 11 | (6 | ) | - | 7 | |||||||||||||||||
Other comprehensive income, net of tax of $1,143 | - | - | - | - | 4,302 | 4,302 | ||||||||||||||||||
Balances, June 30, 2019 | 20,148,017 | 25,184 | 80,864 | 20,345 | 3,313 | 129,706 | ||||||||||||||||||
Net income for the period | - | - | - | 2,403 | - | 2,403 | ||||||||||||||||||
Cash dividends paid, $0.05 per share | - | - | - | (1,008 | ) | - | (1,008 | ) | ||||||||||||||||
Common shares issued for capital raise, net | - | - | - | - | - | - | ||||||||||||||||||
Restricted stock awards | - | - | 56 | - | - | 56 | ||||||||||||||||||
Common shares issued under long-term incentive compensation plan | 19,560 | 24 | 126 | - | - | 150 | ||||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 1,915 | 3 | 12 | (7 | ) | - | 8 | |||||||||||||||||
Other comprehensive income, net of tax of $333 | - | - | - | - | 1,252 | 1,252 | ||||||||||||||||||
Balances, September 30, 2019 | 20,169,492 | $ | 25,211 | $ | 81,058 | $ | 21,733 | $ | 4,565 | $ | 132,567 |
The accompanying notes to consolidated financial statements are an integral part of these statements. |
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
(unaudited) |
Nine Months Ended | ||||||||||||||||
September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 6,261 | $ | 4,785 | $ | 7,587 | $ | 6,281 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Investment securities amortization, net | 756 | 880 | 613 | 607 | ||||||||||||
Equity in trust | (7 | ) | (5 | ) | (10 | ) | (9 | ) | ||||||||
Depreciation and amortization | 1,984 | 1,973 | 2,294 | 2,126 | ||||||||||||
Valuation adjustment for mortgage servicing rights | (4 | ) | - | |||||||||||||
Valuation adjustment for loan servicing rights | 6 | - | ||||||||||||||
Stock-based compensation expense | 234 | 195 | 346 | 215 | ||||||||||||
Provision for loan and lease losses | 486 | 858 | 830 | 2,749 | ||||||||||||
Valuation adjustment for off-balance sheet commitments | 23 | (64 | ) | 245 | (111 | ) | ||||||||||
Net gain on the sale of available-for-sale securities | (1,338 | ) | (960 | ) | ||||||||||||
Net (gain) loss on the sale of available-for-sale debt securities | (702 | ) | 4 | |||||||||||||
Net (gain) loss on equity securities | (31 | ) | 34 | |||||||||||||
Net gain on the sale of mortgage loans held for sale | (241 | ) | (238 | ) | (198 | ) | (171 | ) | ||||||||
Net gain on the sale of other repossessed assets | (47 | ) | - | |||||||||||||
Loss on the disposition of bank premises and equipment | 63 | - | ||||||||||||||
Net gain on the sale of SBA guaranteed loans | (79 | ) | (51 | ) | - | (322 | ) | |||||||||
Net gain on the sale of other real estate owned | (57 | ) | (29 | ) | (20 | ) | (31 | ) | ||||||||
Valuation adjustment of other real estate owned | 307 | 170 | 14 | 89 | ||||||||||||
Loss on disposition of bank premises and equipment | 4 | 44 | ||||||||||||||
Gain on bank-owned life insurance settlement | (114 | ) | - | |||||||||||||
Income from bank-owned life insurance | (399 | ) | (426 | ) | (394 | ) | (413 | ) | ||||||||
Proceeds from the sale of mortgage loans held for sale | 10,216 | 5,592 | 7,271 | 7,904 | ||||||||||||
Funds used to originate mortgage loans held for sale | (9,526 | ) | (4,856 | ) | (7,393 | ) | (7,576 | ) | ||||||||
Decrease in net deferred tax assets | 2,507 | 1,611 | 1,582 | 1,316 | ||||||||||||
Increase in accrued interest receivable | (446 | ) | (261 | ) | ||||||||||||
Decrease (increase) in accrued interest receivable | 576 | (827 | ) | |||||||||||||
(Increase) decrease in prepaid expenses and other assets | (1,733 | ) | 62 | (2,506 | ) | 1,311 | ||||||||||
Increase (decrease) in accrued interest payable | 2 | (10,871 | ) | |||||||||||||
Increase in accrued interest payable | 63 | 77 | ||||||||||||||
Decrease in director indemnification liability | - | (2,553 | ) | |||||||||||||
Decrease in accrued expenses and other liabilities | (1,552 | ) | (944 | ) | (491 | ) | (177 | ) | ||||||||
Total adjustments | 1,149 | (7,364 | ) | 1,985 | 4,286 | |||||||||||
Net cash provided by (used in) operating activities | 7,410 | (2,579 | ) | |||||||||||||
Net cash provided by operating activities | 9,572 | 10,567 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Maturities, calls and principal payments of securities available for sale | 5,655 | 4,972 | ||||||||||||||
Proceeds from the sale of securities available for sale | 130,972 | 32,588 | ||||||||||||||
Purchases of securities available for sale | (133,524 | ) | (37,854 | ) | ||||||||||||
Redemption of the stock in Federal Home Loan Bank of Pittsburgh | 861 | 3,603 | ||||||||||||||
Redemption of Federal Reserve Bank stock | - | 1,351 | ||||||||||||||
Maturities, calls and principal payments of available-for-sale debt securities | 6,454 | 4,675 | ||||||||||||||
Proceeds from the sale of available-for-sale debt securities | 102,345 | 4,559 | ||||||||||||||
Purchases of available-for-sale debt securities | (55,819 | ) | (18,280 | ) | ||||||||||||
Purchase of the stock in Federal Home Loan Bank of Pittsburgh | (1,071 | ) | (570 | ) | ||||||||||||
Net increase in loans to customers | (30,068 | ) | (377 | ) | (29 | ) | (102,370 | ) | ||||||||
Proceeds from the sale of SBA guaranteed loans | 979 | 1,315 | - | 6,032 | ||||||||||||
Proceeds from the sale of other repossessed assets | 280 | - | ||||||||||||||
Proceeds from the sale of other real estate owned | 820 | 1,903 | 769 | 470 | ||||||||||||
Proceeds received from bank-owned life insurance | 419 | - | ||||||||||||||
Purchases of bank premises and equipment | (852 | ) | (376 | ) | (3,879 | ) | (4,818 | ) | ||||||||
Net cash (used in) provided by investing activities | (24,877 | ) | 7,125 | |||||||||||||
Net cash provided by (used in) investing activities | 49,189 | (110,302 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Net (decrease) increase in deposits | (31,927 | ) | 109,413 | (131,569 | ) | 92,673 | ||||||||||
Net proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight | - | (60,500 | ) | 8,300 | - | |||||||||||
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term | 34,673 | 37,753 | 62,713 | 73,929 | ||||||||||||
Repayment of Federal Home Loan Bank of Pittsburgh advances - term | (47,860 | ) | (54,218 | ) | (10,485 | ) | (72,407 | ) | ||||||||
Principal reduction on subordinated debentures | (5,000 | ) | - | (5,000 | ) | - | ||||||||||
Proceeds from issuance of common shares | 456 | 252 | ||||||||||||||
Discount on optional cash purchase plan | (5 | ) | - | |||||||||||||
Proceeds from issuance of common shares, net of discount | 21,331 | 107 | ||||||||||||||
Cash dividends paid | (1,505 | ) | (993 | ) | (3,021 | ) | (2,016 | ) | ||||||||
Net cash (used in) provided by financing activities | (51,168 | ) | 31,707 | (57,731 | ) | 92,286 | ||||||||||
Net (decrease) increase in cash and cash equivalents | (68,635 | ) | 36,253 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,030 | (7,449 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | 112,445 | 21,083 | 36,481 | 37,746 | ||||||||||||
Cash and cash equivalents at end of period | $ | 43,810 | $ | 57,336 | $ | 37,511 | $ | 30,297 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Supplemental cash flow information | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 3,477 | $ | 14,012 | $ | 7,563 | $ | 5,920 | ||||||||
Income taxes | 205 | - | - | 23 | ||||||||||||
Other transactions: | ||||||||||||||||
Loans transferred to other real estate owned and repossessed assets | 80 | 1,210 | ||||||||||||||
Investor loans tranferred to other real estate owned or other assets, net of valuation adjustments | 30 | - | ||||||||||||||
Available-for-sale securities purchased, not settled | 6,012 | - | ||||||||||||||
Change in deferred gain on sale of other real estate owned | - | 5 | ||||||||||||||
Lease liabilities arising from obtaining right-of-use assets | 78 | - | ||||||||||||||
Bank premises and equipment transferred to other real estate owned | - | 220 | ||||||||||||||
Investor loans transferred to other real estate | 256 | - |
The accompanying notes to consolidated financial statements are an integral part of these statements. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(unaudited)
Note 1. Basis of Presentation
The consolidated financial statements of FNCB are comprised of the accounts of FNCB Bancorp, Inc., and its wholly-ownedwholly owned subsidiary, FNCB Bank (the “Bank”), as well as the Bank’s wholly-ownedwholly owned subsidiaries (collectively, “FNCB”). The accounting and reporting policies of FNCB conform to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q10-Q and Article 10-0110-01 of Regulation S-X.S-X. Accordingly, they do not include all the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. Prior period amounts have been reclassified when necessary to conform to the current period’s presentation. Such reclassifications did not have an impact on the operating results or financial position of FNCB. The operating results and financial position of FNCB for the three and nine months ended September 30, 2017,2019, may not be indicative of future results of operations and financial position.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term are the allowance for loan and lease losses (“ALLL”), securities’ valuation and impairment evaluation, the valuation of other real estate owned (“OREO”), and income taxes.
These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in FNCB’s audited financial statements, included in the Annual Report filed on Form 10-K10-K as of and for the year ended December 31, 2016.2018.
Note 2.New Authoritative Accounting Guidance
Accounting Guidance to be Adopted in Future Periods
ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Section A, “Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contract with Customers (Subtopic 340-40);” Section B, “Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables;” and Section C, “Background Information and Basis for Conclusions,” provides a robust framework for addressing revenue recognition issues, and upon its effective date, replaces almost all existing revenue recognition guidance, including industry specific guidance, in current GAAP. On August 12, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): “Deferral of the Effective Date,” which defers the adoption of ASU 2014-09 until the interim and annual reporting periods beginning after December 15, 2017. The core principle of ASU 2014-09 is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which FNCB expects to be entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced interim and annual disclosures, both qualitative and quantitative, about revenue in order to help financial statement users understand the nature, amount, timing and uncertainty of revenue and related cash flows. FNCB will adopt this guidance on January 1, 2018. The guidance allows an entity to apply the new standard either retrospectively or through a cumulative effect adjustment as of January 1, 2018. FNCB’s largest revenue stream is net interest income, which is explicitly excluded from the scope of ASU 2014-09. Deposit-related service charges and gains and losses on the sales of foreclosed real estate are two revenue streams that fall within the scope of ASU 2014-09. Management is currently cataloguing and evaluating all of FNCB’s non-interest revenue streams, including, but not limited to, deposit-related services charges and gains and losses from the sales of foreclosed real estate, using the five-step, contract-based approach to determine applicability to ASU 2014-09 and is reviewing current policies and practices to identify any differences with the new guidance. Management does not expect the adoption of this ASU to have a material impact on the operating results or financial position of FNCB.
ASU 2016-02, Leases (Topic 842): “Leases” will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by the lessee will primarily depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. ASU 2016-02 will also require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The new disclosures will include both qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. ASU 2016-02 is effective with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 for public entities. Accordingly, FNCB will adopt this guidance on January 1, 2019, and is currently evaluating the effect this guidance may have on its operating results or financial position.
ASUAccounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” replaces the current loss impairment methodology under GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. Specifically, the amendments in this ASU will require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income, including such financial assets as loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. On June 17, 2016, the four federal financial institution regulatory agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency), issued a joint statement to provide information about ASU 2016-13 and the initial supervisory views regarding the implementation of the new standard. The joint statement applies to all banks, savings associations, credit unions and financial institution holding companies, regardless of asset size. The statement details the key elements of, and the steps necessary for, the successful transition to the new accounting standard. In addition, the statement notifies financial institutions that because the appropriate allowance levels are institution-specific amounts, the agencies will not establish benchmark targets or ranges for the change in institutions’ allowance levels upon adoption of the ASU, or for allowance levels going forward. Due to the importance of ASU 2016-13, the agencies encourage financial institutions to begin planning and preparing for the transition and state that senior management, under the oversight of the board of directors, should work closely with staff in their accounting, lending, credit risk management, internal audit, and information technology functions during the transition period leading up to, and well after, adoption. ASU 2016-13 iswas originally effective for public business entities that are registered with the U.S. Securities and Exchange Commission (“SEC”) filersunder the Securities Exchange Act of 1934, as amended, including smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On October 16, 2019, the Financial Accounting Standards Board ("FASB") approved its August 2019 proposal to extend the effective date for implementation for smaller reporting companies, private companies and not-for-profits to fiscal years, and interim periods within those years, beginning after December 15, 2022. The FASB expects to issue a final ASU containing this decision in November 2019. Accordingly, FNCB will adopt this guidance on January 1, 2020.2023. FNCB has created a Current Expected Credit Loss (“CECL”) task group comprised of members of its finance, credit administration, lending, internal audit, loan operations and information systems units. The CECL task group has become familiar withunderstands the provisions of ASU 2016-13 and is currently in the process of planning and preparing for the transition toimplementing the new guidance, which includes, but is not limited to: (1) developing an appropriate course of action for FNCB taking into consideration the nature, scope and risk of its lending and investing activities; (2) identifying segments and sub-segments within the loan portfolio that have similar risk characteristics; (3) reviewing(2) determining the existing allowance and credit risk management practices to identify processes that may be leveraged when applying the new guidance; (4) identifying data needs andappropriate methodology for each segment; (3) implementing changes that are necessary to its core operating system and interfaces to be able to capture appropriate data requirements; and (5)(4) evaluating qualitative factors and economic data to develop appropriate forecasts for integration into the model. FNCB is currently evaluating the effect this guidance may have on FNCB’sits operating results and/or financial position, including assessing any potential impact on its capital.
Refer to Note 2 to FNCB’sFNCB’s consolidated financial statements included in the 20162018 Annual Report on Form 10-K and the Quarterly Report on Form 10-Q for the periods ended March 31, 2017 and June 30, 201710-K for a discussion of additional accounting guidance applicable to FNCB that will be adopted in future periods.
Note 3. Securities
During the third quarter of 2017, management identified two subordinated notes issued by other financial institutions in the amount of $1.0 million each and $1.0 million in mandatory-redeemable preferred stock of a subsidiary of another financial institution that were included in loans receivable at December 31, 2016 and 2015. Management determined that these financial instruments are in fact securities and upon identification reclassified the recorded investment in these instruments of $3.0 million from loans receivable to available-for-sale securities. Management also conducted an assessment of materiality of the reclassification to determine if FNCB’s previously-issued consolidated financial statements should be amended. Based on its qualitative and quantitative assessment of materiality, management determined that the reclassification did not have a material impact to FNCB’s financial position or results of operations as of and for the years ended December 31, 2016 and 2015, including the interim periods within those years. In addition, the reclassification did not have a material impact to FNCB’s financial position or results of operations as of and for the interim periods ended March 31, 2017 and June 30, 2017. Accordingly, management concluded that FNCB’s previously-issued consolidated financial statements and notes to the consolidated financial statements could still be relied upon. However, management has elected to correct the error in these current-period consolidated financial statements and notes to the consolidated financial statements by adjusting the prior-period information for comparability. Management engaged an independent third party to conduct a valuation of and provide fair values for these available-for-sale securities as of September 30, 2017, December 31, 2016, December 31, 2015 and for each quarterly period-end of 2017 and 2016. Based on the valuations, management adjusted these available-for-sale securities to fair value at December 31, 2016 and 2015 and each of the quarter-end periods of 2017 and 2016. Specifically, these reclassifications and valuations resulted in the following adjustments to balances included in previously-issued consolidated statements of financial position at December 31, 2016 and 2015 of: 1) increases to securities available for sale of $3.3 million, or 1.22%, and $3.3 million, or 1.29%; 2) decreases to loans, net of the allowance for loan and lease losses of $3.0 million, or 0.41%, for both period ends; 3) increases to total capital, specifically accumulated other comprehensive income, net of income taxes, of $224 thousand, or 0.25%, and $178 thousand, or 0.21%; and 4) decreases to net deferred tax assets of $115 thousand, or 0.43%, and $91 thousand, or 0.32%, respectively. Adjustments to these balances at each of the quarter-end periods of 2017 and 2016 were comparable to those made at December 31, 2016 and 2015, which management has deemed to be immaterial. These reclassifications and valuations had no effect on the consolidated statements of income, the consolidated statements of cash flows, or on earnings per share for the annual and interim periods of 2016 and interim periods of 2017.
During the nine months ended September 30, 2017, FNCB purchased $2.0 million in the subordinated notes of another financial institution. FNCB has classified the subordinated notes and mandatory-redeemable preferred stock as corporate debt securities within its available-for-sale securities portfolio.
Note 3. Securities
Debt Securities
The following tables present thethe amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s available-for-sale debt securities at September 30, 2017 2019and December 31, 2016:2018:
September 30, 2017 | September 30, 2019 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||
Amortized | Holding | Holding | Fair | Amortized | Holding | Holding | Fair | |||||||||||||||||||||||||
(in thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 144,518 | 1,207 | 1,025 | 144,700 | $ | 98,358 | $ | 3,332 | $ | 7 | $ | 101,683 | ||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 35,216 | 221 | 165 | 35,272 | 66,087 | 873 | 120 | 66,840 | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 67,103 | 7 | 651 | 66,459 | 42,812 | 1,025 | 15 | 43,822 | ||||||||||||||||||||||||
Mortgage-backed securities | 22,335 | 258 | 71 | 22,522 | 18,230 | 515 | - | 18,745 | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 9,993 | 70 | - | 10,063 | ||||||||||||||||||||||||||||
Corporate debt securities | 5,000 | 445 | - | 5,445 | 6,000 | 104 | 3 | 6,101 | ||||||||||||||||||||||||
Asset-backed securities | 3,517 | 6 | 11 | 3,512 | 5,227 | 3 | 1 | 5,229 | ||||||||||||||||||||||||
Negotiable certificates of deposit | 3,172 | 20 | - | 3,192 | 2,181 | 2 | - | 2,183 | ||||||||||||||||||||||||
Equity securities | 1,010 | - | 75 | 935 | ||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 281,871 | $ | 2,164 | $ | 1,998 | $ | 282,037 | ||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 248,888 | $ | 5,924 | $ | 146 | $ | 254,666 |
December 31, 2016 | December 31, 2018 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||
Amortized | Holding | Holding | Fair | Amortized | Holding | Holding | Fair | |||||||||||||||||||||||||
(in thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | 12,152 | $ | 36 | $ | - | $ | 12,188 | ||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 119,919 | 257 | 2,303 | 117,873 | $ | 154,268 | $ | 214 | $ | 2,295 | $ | 152,187 | ||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 17,969 | 155 | 40 | 18,084 | 35,147 | 6 | 946 | 34,207 | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 100,064 | 154 | 868 | 99,350 | 76,038 | - | 2,398 | 73,640 | ||||||||||||||||||||||||
Mortgage-backed securities | 20,593 | 159 | 176 | 20,576 | 24,165 | 47 | 278 | 23,934 | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 2,908 | 7 | 2 | 2,913 | ||||||||||||||||||||||||||||
Corporate debt securities | 3,500 | 339 | 47 | 3,792 | 5,000 | 14 | 78 | 4,936 | ||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | 1,825 | - | 23 | 1,802 | ||||||||||||||||||||||||
Negotiable certificates of deposit | 3,172 | 44 | - | 3,216 | 2,428 | - | 15 | 2,413 | ||||||||||||||||||||||||
Equity securities | 1,010 | - | 74 | 936 | ||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 278,379 | $ | 1,144 | $ | 3,508 | $ | 276,015 | ||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 301,779 | $ | 288 | $ | 6,035 | $ | 296,032 |
Except for securities of U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders’shareholders’ equity at September 30, 2017.2019.
At September 30, 20172019 and December 31, 2016,2018, securities with a carrying amount of $266.1$233.3 million and $271.3$286.4 million, respectively, were pledged as collateral to secure public deposits and for other purposes.
The following table showspresents the amortized cost and approximate fair valuematurity information of FNCB’s available-for-sale debt securities at September 30, 2017 by contractual maturity. 2019. Expected maturities will differ from contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary:summary.
September 30, 2017 | September 30, 2019 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(in thousands) | Cost | Value | Cost | Value | ||||||||||||
Amounts maturing in: | ||||||||||||||||
One year or less | $ | 248 | $ | 248 | $ | 3,182 | $ | 3,187 | ||||||||
After one year through five years | 29,192 | 29,367 | 40,529 | 41,666 | ||||||||||||
After five years through ten years | 122,250 | 122,377 | 58,826 | 61,041 | ||||||||||||
After ten years | 1,000 | 1,345 | 4,002 | 4,073 | ||||||||||||
Asset-backed securities | 3,517 | 3,512 | ||||||||||||||
Collateralized mortgage obligations | 102,319 | 101,731 | 118,892 | 120,725 | ||||||||||||
Mortgage-backed securities | 22,335 | 22,522 | 18,230 | 18,745 | ||||||||||||
Asset-backed securities | 5,227 | 5,229 | ||||||||||||||
Total | $ | 280,861 | $ | 281,102 | $ | 248,888 | $ | 254,666 |
Gross proceeds from the sale of available-for-sale debt securities were $54.5$40.9 million and $131.0$102.3 million for the three and nine months ended September 30, 2017, respectively, with2019, respectively. For the three months ended September 30, 2019 gross gains of $0.4 million and $1.4 million, respectively realized upon the sales. Gross losses realized upon the sales were $24 $383thousand and $67 $4thousand, respectively. Gross gains and losses realized upon the sales for the three and nine months ended September 30, 2017.
2019 totaled $732 thousand and $30 thousand, respectively. There were no sales of available-for-sale debt securities for the three months ended September 30, 2016. 2018. Gross proceeds from the sale of available-for-sale debt securities were $32.6$4.6 million for the nine months ended September 30, 2016,2018, with gross gainslosses of $960 $4thousand realized upon the sales. There were no lossesgross gains realized upon the sales of available-for-sale securities for the nine months ended September 30, 2016.2018.
TheThe following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities with unrealized losses at September 30, 2017 2019and December 31, 2016, 2018, aggregated by investment category and length of time the securities have been in an unrealized loss position:position.
September 30, 2017 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Gross | Number | Gross | Number | Gross | Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of US government agencies | - | $ | - | $ | - | - | $ | - | $ | - | - | $ | - | $ | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and policitical subdivisions | 33 | 36,928 | 474 | 16 | 15,302 | 551 | 49 | 52,230 | 1,025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 2 | $ | 2,590 | $ | 7 | - | $ | - | $ | - | 2 | $ | 2,590 | $ | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 6 | 17,596 | 165 | 1 | 77 | - | 7 | 17,673 | 165 | 5 | 25,193 | 120 | - | - | - | 5 | 25,193 | 120 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 19 | 63,381 | 651 | - | - | - | 19 | 63,381 | 651 | 1 | 2,498 | 15 | - | - | - | 1 | 2,498 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 5 | 6,205 | 71 | - | - | - | 5 | 6,205 | 71 | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Private collateralized mortgage obligations | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | - | - | - | - | - | - | - | - | - | 1 | 1,997 | 3 | - | - | - | 1 | 1,997 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities | 1 | 2,768 | 11 | - | - | - | 1 | 2,768 | 11 | - | - | - | 1 | 894 | 1 | 1 | 894 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negotiable certificates of deposit | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | - | - | - | 1 | 925 | 75 | 1 | 925 | 75 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 64 | $ | 126,878 | $ | 1,372 | 18 | $ | 16,304 | $ | 626 | 82 | $ | 143,182 | $ | 1,998 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total available-for-sale debt securities | 9 | $ | 32,278 | $ | 145 | 1 | $ | 894 | $ | 1 | 10 | $ | 33,172 | $ | 146 |
December 31, 2016 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Gross | Number | Gross | Number | Gross | Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | - | $ | - | $ | - | - | $ | - | $ | - | - | $ | - | $ | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and policitical subdivisions | 82 | 88,479 | 2,303 | - | - | - | 82 | 88,479 | 2,303 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 3 | $ | 7,154 | $ | 205 | 109 | $ | 112,563 | $ | 2,090 | 112 | $ | 119,717 | $ | 2,295 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 2 | 4,514 | 40 | 1 | 175 | - | 3 | 4,689 | 40 | - | - | - | 14 | 31,414 | 946 | 14 | 31,414 | 946 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 17 | 70,146 | 868 | - | - | - | 17 | 70,146 | 868 | - | - | - | 25 | 73,640 | 2,398 | 25 | 73,640 | 2,398 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 5 | 6,495 | 176 | - | - | - | 5 | 6,495 | 176 | 1 | 52 | - | 6 | 10,294 | 278 | 7 | 10,346 | 278 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Private collateralized mortgage obligations | 1 | 950 | 2 | - | - | - | 1 | 950 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | - | - | - | 1 | 453 | 47 | 1 | 453 | 47 | 2 | 2,922 | 78 | - | - | - | 2 | 2,922 | 78 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | - | - | - | - | - | 1 | 369 | 2 | 1 | 1,433 | 21 | 2 | 1,802 | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negotiable certificates of deposit | - | - | - | - | - | - | - | - | - | 3 | 740 | 3 | 7 | 1,673 | 12 | 10 | 2,413 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | - | - | - | 1 | 926 | 74 | 1 | 926 | 74 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 106 | $ | 169,634 | $ | 3,387 | 3 | $ | 1,554 | $ | 121 | 109 | $ | 171,188 | $ | 3,508 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total available-for-sale debt securities | 11 | $ | 12,187 | $ | 290 | 162 | $ | 231,017 | $ | 5,745 | 173 | $ | 243,204 | $ | 6,035 |
Management evaluates individual securities in an unrealized loss position quarterly for other than temporary impairment (“OTTI”). As part of its evaluation, management considers, among other things, the length of time a security’s fair value is less than its amortized cost, the severity of decline, any credit deterioration of the issuer, whether or not management intends to sell the security, and whether it is more likely than not that FNCB will be required to sell the security prior to recovery of its amortized cost.
There were 82 10 securities in an unrealized lossposition at September 30, 2017, 2019, including 49 obligations of state and political subdivisions, 31six securities issued by a U.S. government or government-sponsored agency, two obligations of state and political subdivisions, one asset-backed security and one equitycorporate debt security. Management performed a review of all securities in an unrealized loss position as of September 30, 2017, 2019and determined that movementschanges in the fair values of the securities were consistent with the changemovements in market interest rates. In addition, as part of its review, management noted that there was no material change in the credit quality of any of the issuers or any other event or circumstance that may cause a significant adverse effect on the fair value of these securities. Moreover, to date, FNCB has received all scheduled principal and interest payments and expects to fully collect all future contractual principal and interest payments on all securities in an unrealized loss position at September 30, 2017. 2019. FNCB does not intend to sell the securities, nor is it more likely than not that it will be required to sell the securities, prior to recovery of their amortized cost. Based on the results of its review and considering the attributes of these debt and equity securities, management concluded that the individual unrealized losses were temporary and OTTI did not exist at September 30, 2017.2019.
InvestmentEquity Securities
FNCB’s investment in equity securities consists entirely of a mutual fund investment comprised of one- to four-family residential mortgage-backed securities collateralized by properties within FNCB’s geographical market. At September 30, 2019, this mutual fund had an amortized cost of $1 million and an unrealized loss of $78 thousand, resulting in a fair value of $922 thousand. In accordance with ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and Financial Liabilities” which became effective January 1, 2018, FNCB recognizes any changes in the fair value of this equity security in the consolidated statements of income on a prospective basis. Upon the adoption of this new accounting guidance on January 1, 2018, FNCB recorded a one-time reclassification between retained earnings and accumulated other comprehensive loss for the unrealized loss on this mutual fund, net of taxes, of $65 thousand. The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the nine months ended September 30, 2019 and 2018.
Nine Months Ended September 30, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Net gains (losses) recognized on equity securities | $ | 31 | $ | (34 | ) | |||
Less: net gains (losses) recognized on equity securities sold | - | - | ||||||
Unrealized gains (losses) on equity securities held | $ | 31 | $ | (34 | ) |
Restricted Securities
The following table presents FNCB's investment in restricted securities at September 30, 2019 and December 31, 2018. Restricted securities have limited marketability and are carried at cost.
September 30, | December 31, | |||||||
(in thousands) | 2019 | 2018 | ||||||
Stock in Federal Home Loan Bank of Pittsburgh | $ | 4,184 | $ | 3,113 | ||||
Stock in Atlantic Community Banker's Bank | 10 | 10 | ||||||
Total restricted securities, at cost | $ | 4,194 | $ | 3,123 |
Management noted no indicators of impairment for the Federal Home Loan Bank (“FHLB”) of Pittsburgh or Atlantic Community Banker’s Bank stock has limited marketability and is carried at cost. FNCB’s investment in FHLB of Pittsburgh stock totaled $2.5 million and $3.3 million at September 30, 2017 2019and December 31, 2016, respectively. Management noted no indicators of impairment for the FHLB of Pittsburgh stock at September 30, 2017 and December 31, 2016.2018.
During the third quarter of 2017, Equity Securities without Readily Determinable Fair Values
FNCB purchased $1.2owns a $1.7 million representing approximately 4.9%, ofinvestment in the common stock of a privately-held bank holding company. The common stock was purchased during 2017as part of a private placement pursuant to an exemption from the registrationregistration requirements of the Securities Act of 1933, as amended, for offerings not involving any public offering. The common stock of such bank holding company is not currently traded on any established market and is not expected to be traded in the near future on any securities exchange or established over-the-counter market. FNCB has elected to account for this transaction as an investment in an equity security without a readily determinable fair value. An equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value. The $1.2$1.7 million investment is included in other assets in the consolidated statements of financial condition at September 30, 2017. Management2019 and December 31, 2018. As part of its qualitative assessment, management engaged an independent third party to provide a valuation of this investment as of September 30, 2017. The valuation2019, which indicated that the investment was not impaired and accordingly, impaired. Management determined that no adjustment for impairment iswas required at September 30, 2017.2019.
Note 4. Loans
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The following table summarizes loans receivable, net, by category at September 30, 2017 2019and December 31, 2016:2018:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
Residential real estate | $ | 152,257 | $ | 144,260 | $ | 165,850 | $ | 164,833 | ||||||||
Commercial real estate | 253,791 | 243,830 | 279,591 | 262,778 | ||||||||||||
Construction, land acquisition and development | 26,805 | 18,357 | 39,371 | 20,813 | ||||||||||||
Commercial and industrial | 146,048 | 150,758 | 163,464 | 150,962 | ||||||||||||
Consumer | 138,734 | 127,844 | 148,435 | 176,784 | ||||||||||||
State and political subdivisions | 39,271 | 43,709 | 37,636 | 59,037 | ||||||||||||
Total loans, gross | 756,906 | 728,758 | 834,347 | 835,207 | ||||||||||||
Unearned income | (84 | ) | (48 | ) | (71 | ) | (70 | ) | ||||||||
Net deferred loan costs | 2,667 | 2,569 | 2,601 | 3,963 | ||||||||||||
Allowance for loan and lease losses | (8,862 | ) | (8,419 | ) | (9,315 | ) | (9,519 | ) | ||||||||
Loans, net | $ | 750,627 | $ | 722,860 | $ | 827,562 | $ | 829,581 |
FNCB has granted loans, letters of credit and lines of credit to certain of its executive officers and directors as well as to certain of their related parties. For more information about related party transactions, refer to Note 7,6, “Related Party Transactions” to these consolidated financial statements.
FNCB originates one- to four-family1-4 family mortgage loans for sale in the secondary market. During the three months and nine months ended September 30, 2017, one- to four-family2019, one-to four-family mortgages sold on the secondary market were $3.7$2.9 million and $10.0$7.1 million, respectively. For the three and nine months ended September 30, 2018, 1-4 family residential mortgages sold on the secondary market were$2.7million and$7.7 million, respectively. Net gains on the sale of residential mortgage loans for the three and nine months ended September 30, 20172019 were $106$69 thousand and $241$198 thousand, respectively and $99$71 thousand and $238$171 thousand, respectively, for the comparable periods of 2016.2018. FNCB retains servicing rights on these mortgages.mortgages sold on the secondary market. At September 30, 2017 2019and December 31, 2016, 2018, there were $147 thousand$1.1 million and $596 thousand$0.8 million in one- to four-family1-4 family residential mortgage loans held for sale, respectively.
During the three and the nine months ended September 30, 2017, 2018, FNCB sold the guaranteed principal balance of loans that were guaranteed by the Small Business Administration (“SBA”) totaling $322 thousand and $900 thousand, respectively. Net$5.7 million. For the nine months ended September 30, 2018, proceeds received from the sale of SBA-guaranteed loans were $6.0 million with net gains realized upon the sales andof $0.3 million included in non-interest income totaled $23 thousand and $79 thousand for the three and nine months ended September 30, 2017, respectively.income. FNCB retained the servicing rights on these loans. Net gains realized upon theThere were no sales of SBA guaranteedSBA-guaranteed loans forduring the three and nine months ended September 30, 2016 totaled $51 thousand.2019. The unpaid principal balance of loans serviced for others, including residential mortgages and SBA-guaranteed loans, were $106.1 million at September 30, 2019and $108.4 million at December 31, 2018.
FNCB does not have any lending programs commonly referred to as subprime"subprime lending." Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, and bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.
There were no material changes to the risk characteristics of FNCB’sFNCB’s loan segments, loan classification and credit grading systems and methodology for determining the adequacy of the ALLL during the nine months ended September 30, 2017. 2019. Refer to Note 2, “Summary of Significant Accounting Policies” to FNCB’s consolidated financial statements included in the 20162018 Annual Report on Form 10-K10-K for information about the risk characteristics related to FNCB’s loan segments, loan classification and credit grading systems and methodology for determining the adequacy of the ALLL.
Each quarter, managementManagement evaluates the ALLLcredit quality of the loan portfolio on an ongoing basis, and adjustsperforms a formal review of the adequacy of the ALLL on a quarterly basis. This evaluation is inherently subjective, as appropriate throughit requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses may be significantly more than the established ALLL, which could have a provisionmaterial negative effect on FNCB’s operating results or credit for loan losses.financial condition. While management uses the best information available to make its evaluations, future adjustments to the ALLL may be necessary if conditions differ substantially from the information used in making the evaluations. In addition,Banking regulators, as an integral part of itstheir examination process, bank regulators periodicallyof FNCB, also review the ALLL. These regulators ALLL, and may require, FNCB to adjust the ALLL based on their analysis ofjudgments about information available to them at the time of examination.their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL.
The following table summarizessummarizes activity in the ALLL by loan category for the three and nine months ended September 30, 2017 2019and 2016:2018.
Real Estate | ||||||||||||||||||||||||||||||||
Residential | Commercial | Construction, Land Acquisition and | Commercial | State and Political | ||||||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
Three months ended September 30, 2017: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, July 1, 2017 | $ | 1,148 | $ | 3,022 | $ | 236 | $ | 2,313 | $ | 1,442 | $ | 308 | $ | - | $ | 8,469 | ||||||||||||||||
Charge-offs | (32 | ) | (85 | ) | - | (128 | ) | (132 | ) | - | - | (377 | ) | |||||||||||||||||||
Recoveries | 16 | 38 | - | 125 | 48 | - | - | 227 | ||||||||||||||||||||||||
Provisions (credits) | 46 | 328 | 41 | 53 | 75 | - | - | 543 | ||||||||||||||||||||||||
Ending balance, September 30, 2017 | $ | 1,178 | $ | 3,303 | $ | 277 | $ | 2,363 | $ | 1,433 | $ | 308 | $ | - | $ | 8,862 | ||||||||||||||||
Three months ended September 30, 2016: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, July 1, 2016 | $ | 1,099 | $ | 3,095 | $ | 717 | $ | 1,565 | $ | 1,350 | $ | 733 | $ | - | $ | 8,559 | ||||||||||||||||
Charge-offs | (37 | ) | - | - | (18 | ) | (134 | ) | - | - | (189 | ) | ||||||||||||||||||||
Recoveries | 2 | 1 | - | 184 | 167 | - | - | 354 | ||||||||||||||||||||||||
Provisions (credits) | 49 | 185 | (50 | ) | (232 | ) | 50 | (236 | ) | - | (234 | ) | ||||||||||||||||||||
Ending balance, September 30, 2016 | $ | 1,113 | $ | 3,281 | $ | 667 | $ | 1,499 | $ | 1,433 | $ | 497 | $ | - | $ | 8,490 | ||||||||||||||||
Nine months ended September 30, 2017: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2017 | $ | 1,171 | $ | 3,297 | $ | 268 | $ | 1,736 | $ | 1,457 | $ | 490 | $ | - | $ | 8,419 | ||||||||||||||||
Charge-offs | (112 | ) | (114 | ) | - | (475 | ) | (438 | ) | - | - | (1,139 | ) | |||||||||||||||||||
Recoveries | 28 | 43 | 421 | 304 | 300 | - | - | 1,096 | ||||||||||||||||||||||||
Provisions (credits) | 91 | 77 | (412 | ) | 798 | 114 | (182 | ) | - | 486 | ||||||||||||||||||||||
Ending balance, September 30, 2017 | $ | 1,178 | $ | 3,303 | $ | 277 | $ | 2,363 | $ | 1,433 | $ | 308 | $ | - | $ | 8,862 | ||||||||||||||||
Nine months ended September 30, 2016: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2016 | $ | 1,333 | $ | 3,346 | $ | 853 | $ | 1,205 | $ | 1,494 | $ | 485 | $ | 74 | $ | 8,790 | ||||||||||||||||
Charge-offs | (61 | ) | (251 | ) | - | (1,082 | ) | (652 | ) | - | - | (2,046 | ) | |||||||||||||||||||
Recoveries | 4 | 4 | 9 | 396 | 475 | - | - | 888 | ||||||||||||||||||||||||
Provisions (credits) | (163 | ) | 182 | (195 | ) | 980 | 116 | 12 | (74 | ) | 858 | |||||||||||||||||||||
Ending balance, September 30, 2016 | $ | 1,113 | $ | 3,281 | $ | 667 | $ | 1,499 | $ | 1,433 | $ | 497 | $ | - | $ | 8,490 |
Construction, | ||||||||||||||||||||||||||||||||
Land | State and | |||||||||||||||||||||||||||||||
Residential | Commercial | Acquisition and | Commercial | Political | ||||||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
Three months ended September 30, 2019: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, July 1, 2019 | $ | 1,152 | $ | 3,429 | $ | 178 | $ | 2,071 | $ | 1,839 | $ | 211 | $ | 65 | $ | 8,945 | ||||||||||||||||
Charge-offs | - | - | - | (216 | ) | (201 | ) | - | - | (417 | ) | |||||||||||||||||||||
Recoveries | 1 | - | 1 | 58 | 90 | - | - | 150 | ||||||||||||||||||||||||
Provisions (credits) | 5 | 422 | 47 | 78 | 68 | 5 | 12 | 637 | ||||||||||||||||||||||||
Ending balance, September 30, 2019 | $ | 1,158 | $ | 3,851 | $ | 226 | $ | 1,991 | $ | 1,796 | $ | 216 | $ | 77 | $ | 9,315 | ||||||||||||||||
Three months ended September 30, 2018: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, July 1, 2018 | $ | 1,201 | $ | 3,107 | $ | 251 | $ | 2,455 | $ | 2,006 | $ | 439 | $ | - | $ | 9,459 | ||||||||||||||||
Charge-offs | - | (719 | ) | - | (5 | ) | (313 | ) | - | - | (1,037 | ) | ||||||||||||||||||||
Recoveries | 5 | 39 | - | 58 | 154 | - | - | 256 | ||||||||||||||||||||||||
Provisions (credits) | (39 | ) | 803 | (56 | ) | 83 | 273 | 61 | 24 | 1,149 | ||||||||||||||||||||||
Ending balance, September 30, 2018 | $ | 1,167 | $ | 3,230 | $ | 195 | $ | 2,591 | $ | 2,120 | $ | 500 | $ | 24 | $ | 9,827 | ||||||||||||||||
Nine months ended September 30, 2019: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2019 | $ | 1,175 | $ | 3,107 | $ | 188 | $ | 2,552 | $ | 2,051 | $ | 417 | $ | 29 | $ | 9,519 | ||||||||||||||||
Charge-offs | (27 | ) | - | (18 | ) | (976 | ) | (973 | ) | - | - | (1,994 | ) | |||||||||||||||||||
Recoveries | 7 | 14 | 82 | 265 | 592 | - | - | 960 | ||||||||||||||||||||||||
Provisions (credits) | 3 | 730 | (26 | ) | 150 | 126 | (201 | ) | 48 | 830 | ||||||||||||||||||||||
Ending balance, September 30, 2019 | $ | 1,158 | $ | 3,851 | $ | 226 | $ | 1,991 | $ | 1,796 | $ | 216 | $ | 77 | $ | 9,315 | ||||||||||||||||
Nine months ended September 30, 2018: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2018 | $ | 1,236 | $ | 3,499 | $ | 209 | $ | 2,340 | $ | 1,395 | $ | 355 | $ | - | $ | 9,034 | ||||||||||||||||
Charge-offs | (63 | ) | (1,845 | ) | - | (86 | ) | (753 | ) | - | - | (2,747 | ) | |||||||||||||||||||
Recoveries | 132 | 42 | 30 | 205 | 382 | - | - | 791 | ||||||||||||||||||||||||
Provisions (credits) | (138 | ) | 1,534 | (44 | ) | 132 | 1,096 | 145 | 24 | 2,749 | ||||||||||||||||||||||
Ending balance, September 30, 2018 | $ | 1,167 | $ | 3,230 | $ | 195 | $ | 2,591 | $ | 2,120 | $ | 500 | $ | 24 | $ | 9,827 |
The following table represents the allocation of the ALLL and the related loan balance, by loan category, disaggregated based on the impairment methodology at September 30, 2017 2019and December 31, 2016:2018:
Real Estate | ||||||||||||||||||||||||||||
Construction, | ||||||||||||||||||||||||||||
Land | State and | |||||||||||||||||||||||||||
Residential | Commercial | Acquisition and | Commercial | Political | ||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Total | |||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 7 | $ | 163 | $ | - | $ | 600 | $ | 2 | $ | - | $ | 772 | ||||||||||||||
Collectively evaluated for impairment | 1,171 | 3,140 | 277 | 1,763 | 1,431 | 308 | 8,090 | |||||||||||||||||||||
Total | $ | 1,178 | $ | 3,303 | $ | 277 | $ | 2,363 | $ | 1,433 | $ | 308 | $ | 8,862 | ||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,789 | $ | 8,256 | $ | 86 | $ | 795 | $ | 397 | $ | - | $ | 11,323 | ||||||||||||||
Collectively evaluated for impairment | 150,468 | 245,535 | 26,719 | 145,253 | 138,337 | 39,271 | 745,583 | |||||||||||||||||||||
Total | $ | 152,257 | $ | 253,791 | $ | 26,805 | $ | 146,048 | $ | 138,734 | $ | 39,271 | $ | 756,906 | ||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 29 | $ | 254 | $ | - | $ | 18 | $ | 1 | $ | - | $ | 302 | ||||||||||||||
Collectively evaluated for impairment | 1,142 | 3,043 | 268 | 1,718 | 1,456 | 490 | 8,117 | |||||||||||||||||||||
Total | $ | 1,171 | $ | 3,297 | $ | 268 | $ | 1,736 | $ | 1,457 | $ | 490 | $ | 8,419 | ||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,929 | $ | 2,937 | $ | 350 | $ | 91 | $ | 297 | $ | - | $ | 5,604 | ||||||||||||||
Collectively evaluated for impairment | 142,331 | 240,893 | 18,007 | 150,667 | 127,547 | 43,709 | 723,154 | |||||||||||||||||||||
Total | $ | 144,260 | $ | 243,830 | $ | 18,357 | $ | 150,758 | $ | 127,844 | $ | 43,709 | $ | 728,758 |
Construction, | ||||||||||||||||||||||||||||||||
Land | State and | |||||||||||||||||||||||||||||||
Residential | Commercial | Acquisition and | Commercial | Political | ||||||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
September 30, 2019 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 25 | $ | 228 | $ | - | $ | 38 | $ | 1 | $ | - | $ | - | $ | 292 | ||||||||||||||||
Collectively evaluated for impairment | 1,133 | 3,623 | 226 | 1,953 | 1,795 | 216 | 77 | 9,023 | ||||||||||||||||||||||||
Total | $ | 1,158 | $ | 3,851 | $ | 226 | $ | 1,991 | $ | 1,796 | $ | 216 | $ | 77 | $ | 9,315 | ||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,638 | $ | 9,383 | $ | 78 | $ | 733 | $ | 197 | $ | - | $ | - | $ | 13,029 | ||||||||||||||||
Collectively evaluated for impairment | 163,212 | 270,208 | 39,293 | 162,731 | 148,238 | 37,636 | - | 821,318 | ||||||||||||||||||||||||
Total | $ | 165,850 | $ | 279,591 | $ | 39,371 | $ | 163,464 | $ | 148,435 | $ | 37,636 | $ | - | $ | 834,347 | ||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 14 | $ | 41 | $ | - | $ | 600 | $ | 2 | $ | - | $ | - | $ | 657 | ||||||||||||||||
Collectively evaluated for impairment | 1,161 | 3,066 | 188 | 1,952 | 2,049 | 417 | 29 | 8,862 | ||||||||||||||||||||||||
Total | $ | 1,175 | $ | 3,107 | $ | 188 | $ | 2,552 | $ | 2,051 | $ | 417 | $ | 29 | $ | 9,519 | ||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,847 | $ | 9,408 | $ | 82 | $ | 697 | $ | 383 | $ | - | $ | - | $ | 12,417 | ||||||||||||||||
Collectively evaluated for impairment | 162,986 | 253,370 | 20,731 | 150,265 | 176,401 | 59,037 | - | 822,790 | ||||||||||||||||||||||||
Total | $ | 164,833 | $ | 262,778 | $ | 20,813 | $ | 150,962 | $ | 176,784 | $ | 59,037 | $ | - | $ | 835,207 |
Credit Quality Indicators – Commercial Loans
Management continuously monitors and evaluates the credit quality of FNCB’s commercial loans by regularly reviewing certain credit quality indicators. Management utilizes credit risk ratings as the key credit quality indicator for evaluating the credit quality of FNCB’s loan receivables.
FNCB’sFNCB’s loan rating system assigns a degree of risk to commercial loans based on relevant information about the ability of borrowers to service their debt such asas: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Management analyzes these non-homogeneous loans individually by grading the loans as to credit risk and probability of collection for each type of loan. Commercial and industrial loans include commercial indirect auto loans which are not individually risk rated, and construction, land acquisition and development loans include residential construction loans which are also not individually risk rated. These loans are monitored on a pool basis due to their homogeneous nature as described in “Credit Quality Indicators – Other Loans” below. FNCB risk rates certain residential real estate loans and consumer loans that are part of a larger commercial relationship using a credit grading system thatas described in “Credit Quality Indicators – Commercial Loans.” The grading system contains the following basic risk categories:
1. | Minimal Risk |
2. | Above Average Credit Quality |
3. | Average Risk |
4. | Acceptable Risk |
5. | Pass - Watch |
6. | Special Mention |
7. | Substandard - Accruing |
8. | Substandard - Non-Accrual |
9. | Doubtful |
10. | Loss |
1. Minimal Risk
2. Above Average Credit Quality
3. Average Risk
4. Acceptable Risk
5. Pass - Watch
6. Special Mention
7. Substandard - Accruing
8. Substandard - Non-Accrual
9. Doubtful
10. Loss
This analysis is performed on a quarterly basis using the following definitions for risk ratings:
Pass – Assets rated 1 through 5 are considered pass ratings. These assets show no current or potential problems and are considered fully collectible. All such loans are evaluated collectively for ALLL calculation purposes. However, accruing loans restructured under a troubled debt restructuring (“TDRs”) that have been performing for an extended period, do not represent a higher risk of loss, and have been upgraded to a pass rating are evaluated individually for impairment.
Special Mention – Assets classified as special mention do not currently expose FNCB to a sufficient degree of risk to warrant an adverse classification but do possess credit deficiencies or potential weaknesses deserving close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk which, if not corrected, could weaken the asset and increase risk in the future.
Substandard – Assets classified as substandard have well defined weaknesses based on objective evidence, and are characterized by the distinct possibility that FNCB will sustain some loss if the deficiencies are not corrected.
Doubtful – Assets classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable and improbable based on current circumstances.
Loss – Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.
Credit Quality Indicators – Other Loans
Certain residential real estate loans, consumer loans, and commercial indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that are delinquent 90 days or more are placed on non-accrual status unless collection of the loan is in process and reasonably assured. FNCB utilizes accruing versus non-accrual status as the credit quality indicator for these loan pools.
The following tablestables present the recorded investment in loans receivable by loan category and credit quality indicator at September 30, 2017 2019and December 31, 2016:2018:
Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
Commercial Loans | Other Loans | |||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | |||||||||||||||||||||||||||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | ||||||||||||||||||||||||||||||
Residential real estate | $ | 22,866 | $ | 331 | $ | 317 | $ | - | $ | - | $ | 23,514 | $ | 128,287 | $ | 456 | $ | 128,743 | $ | 152,257 | ||||||||||||||||||||
Commercial real estate | 237,484 | 7,695 | 8,612 | - | - | 253,791 | - | - | - | 253,791 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | 23,716 | 333 | 6 | - | - | 24,055 | 2,750 | - | 2,750 | 26,805 | ||||||||||||||||||||||||||||||
Commercial and industrial | 140,427 | 882 | 1,176 | - | - | 142,485 | 3,563 | - | 3,563 | 146,048 | ||||||||||||||||||||||||||||||
Consumer | 2,373 | 94 | 35 | - | - | 2,502 | 136,002 | 230 | 136,232 | 138,734 | ||||||||||||||||||||||||||||||
State and political subdivisions | 38,864 | - | 407 | - | - | 39,271 | - | - | - | 39,271 | ||||||||||||||||||||||||||||||
Total | $ | 465,730 | $ | 9,335 | $ | 10,553 | $ | - | $ | - | $ | 485,618 | $ | 270,602 | $ | 686 | $ | 271,288 | $ | 756,906 |
Credit Quality Indicators | Credit Quality Indicators | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2016 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Loans | Other Loans | Commercial Loans | Other Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | 25,506 | $ | 394 | $ | 466 | $ | - | $ | - | $ | 26,366 | $ | 117,286 | $ | 608 | $ | 117,894 | $ | 144,260 | $ | 32,373 | $ | 214 | $ | 226 | $ | - | $ | - | $ | 32,813 | $ | 131,809 | $ | 1,228 | $ | 133,037 | $ | 165,850 | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | 233,523 | 4,911 | 5,396 | - | - | 243,830 | - | - | - | 243,830 | 261,053 | 6,655 | 11,883 | - | - | 279,591 | - | - | - | 279,591 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction, land acquisition and development | 14,101 | 346 | 448 | - | - | 14,895 | 3,462 | - | 3,462 | 18,357 | 37,543 | - | - | - | - | 37,543 | 1,828 | - | 1,828 | 39,371 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 142,794 | 2,794 | 1,128 | - | - | 146,716 | 4,042 | - | 4,042 | 150,758 | 153,618 | 2,474 | 1,878 | - | - | 157,970 | 5,494 | - | 5,494 | 163,464 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 2,699 | - | 37 | - | - | 2,736 | 124,935 | 173 | 125,108 | 127,844 | 2,907 | - | - | - | - | 2,907 | 144,899 | 629 | 145,528 | 148,435 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and political subdivisions | 40,424 | 2,964 | 321 | - | - | 43,709 | - | - | - | 43,709 | 37,615 | - | - | - | - | 37,615 | 21 | - | 21 | 37,636 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 459,047 | $ | 11,409 | $ | 7,796 | $ | - | $ | - | $ | 478,252 | $ | 249,725 | $ | 781 | $ | 250,506 | $ | 728,758 | $ | 525,109 | $ | 9,343 | $ | 13,987 | $ | - | $ | - | $ | 548,439 | $ | 284,051 | $ | 1,857 | $ | 285,908 | $ | 834,347 |
Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Commercial Loans | Other Loans | |||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | |||||||||||||||||||||||||||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | ||||||||||||||||||||||||||||||
Residential real estate | $ | 33,573 | $ | 291 | $ | 154 | $ | - | $ | - | $ | 34,018 | $ | 130,132 | $ | 683 | $ | 130,815 | $ | 164,833 | ||||||||||||||||||||
Commercial real estate | 250,674 | 1,858 | 10,246 | - | - | 262,778 | - | - | - | 262,778 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | 17,704 | - | 757 | - | - | 18,461 | 2,352 | - | 2,352 | 20,813 | ||||||||||||||||||||||||||||||
Commercial and industrial | 137,888 | 4,193 | 2,448 | - | - | 144,529 | 6,421 | 12 | 6,433 | 150,962 | ||||||||||||||||||||||||||||||
Consumer | 2,024 | - | - | - | - | 2,024 | 174,373 | 387 | 174,760 | 176,784 | ||||||||||||||||||||||||||||||
State and political subdivisions | 57,345 | 1,665 | 27 | - | - | 59,037 | - | - | - | 59,037 | ||||||||||||||||||||||||||||||
Total | $ | 499,208 | $ | 8,007 | $ | 13,632 | $ | - | $ | - | $ | 520,847 | $ | 313,278 | $ | 1,082 | $ | 314,360 | $ | 835,207 |
Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded investment in these non-accrual loans was $2.6$6.1 million and $2.2$4.7 million at September 30, 2017 2019and December 31, 2016, 2018, respectively. Generally, loans are placed on non-accrual status when they become 90 days or more delinquent, and remaindelinquent. Once a loan is placed on non-accrual status, it remains on non-accrual status until they areit has been brought current, have has six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accrual status. There were no loans past due 90 days or more and still accruing at September 30, 2017 2019and December 31, 2016.2018.
The following tables present the delinquency status of past due and non-accrual loans at September 30, 2017 2019and December 31, 2016:2018:
September 30, 2017 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||
Delinquency Status | Delinquency Status | |||||||||||||||||||||||||||||||||||||||
0-29 Days | 30-59 Days | 60-89 Days | >/= 90 Days | 0-29 Days | 30-59 Days | 60-89 Days | >/= 90 Days | |||||||||||||||||||||||||||||||||
(in thousands) | Past Due | Past Due | Past Due | Past Due | Total | Past Due | Past Due | Past Due | Past Due | Total | ||||||||||||||||||||||||||||||
Performing (accruing) loans: | ||||||||||||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | 151,136 | $ | 271 | $ | 328 | $ | - | $ | 151,735 | $ | 163,591 | $ | 851 | $ | - | $ | - | $ | 164,442 | ||||||||||||||||||||
Commercial real estate | 251,467 | 519 | 704 | - | 252,690 | 275,847 | - | 414 | - | 276,261 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | 26,777 | 28 | - | - | 26,805 | 39,371 | - | - | - | 39,371 | ||||||||||||||||||||||||||||||
Total real estate | 429,380 | 818 | 1,032 | - | 431,230 | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 144,896 | 272 | 91 | - | 145,259 | 162,247 | 262 | 203 | - | 162,712 | ||||||||||||||||||||||||||||||
Consumer | 137,235 | 992 | 277 | - | 138,504 | 145,989 | 1,500 | 317 | - | 147,806 | ||||||||||||||||||||||||||||||
State and political subdivisions | 39,262 | 9 | - | - | 39,271 | 37,636 | - | - | - | 37,636 | ||||||||||||||||||||||||||||||
Total performing (accruing) loans | 750,773 | 2,091 | 1,400 | - | 754,264 | 824,681 | 2,613 | 934 | - | 828,228 | ||||||||||||||||||||||||||||||
Non-accrual loans: | ||||||||||||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||
Residential real estate | 230 | - | 191 | 101 | 522 | 552 | - | - | 856 | 1,408 | ||||||||||||||||||||||||||||||
Commercial real estate | - | - | - | 1,101 | 1,101 | 1,133 | - | 428 | 1,769 | 3,330 | ||||||||||||||||||||||||||||||
Construction, land aquisition and development | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Total real estate | 230 | - | 191 | 1,202 | 1,623 | |||||||||||||||||||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 750 | - | - | 39 | 789 | 487 | - | - | 265 | 752 | ||||||||||||||||||||||||||||||
Consumer | 76 | 18 | 6 | 130 | 230 | 226 | 73 | 153 | 177 | 629 | ||||||||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total non-accrual loans | 1,056 | 18 | 197 | 1,371 | 2,642 | 2,398 | 73 | 581 | 3,067 | 6,119 | ||||||||||||||||||||||||||||||
Total loans receivable | $ | 751,829 | $ | 2,109 | $ | 1,597 | $ | 1,371 | $ | 756,906 | $ | 827,079 | $ | 2,686 | $ | 1,515 | $ | 3,067 | $ | 834,347 |
December 31, 2018 | ||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||
0-29 Days | 30-59 Days | 60-89 Days | >/= 90 Days | |||||||||||||||||
(in thousands) | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||
Performing (accruing) loans: | ||||||||||||||||||||
Residential real estate | $ | 163,690 | $ | 319 | $ | 136 | $ | - | $ | 164,145 | ||||||||||
Commercial real estate | 259,904 | - | - | - | 259,904 | |||||||||||||||
Construction, land acquisition and development | 20,813 | - | - | - | 20,813 | |||||||||||||||
Commercial and industrial | 150,108 | 87 | 20 | - | 150,215 | |||||||||||||||
Consumer | 173,890 | 2,221 | 286 | - | 176,397 | |||||||||||||||
State and political subdivisions | 59,037 | - | - | - | 59,037 | |||||||||||||||
Total performing (accruing) loans | 827,442 | 2,627 | 442 | - | 830,511 | |||||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Residential real estate | 443 | - | 136 | 109 | 688 | |||||||||||||||
Commercial real estate | 1,061 | - | - | 1,813 | 2,874 | |||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | |||||||||||||||
Commercial and industrial | 677 | 50 | - | 20 | 747 | |||||||||||||||
Consumer | 91 | 61 | 74 | 161 | 387 | |||||||||||||||
State and political subdivisions | - | - | - | - | - | |||||||||||||||
Total non-accrual loans | 2,272 | 111 | 210 | 2,103 | 4,696 | |||||||||||||||
Total loans receivable | $ | 829,714 | $ | 2,738 | $ | 652 | $ | 2,103 | $ | 835,207 |
December 31, 2016 | ||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||
0-29 Days | 30-59 Days | 60-89 Days | >/= 90 Days | |||||||||||||||||
(in thousands) | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||
Performing (accruing) loans: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential real estate | $ | 143,142 | $ | 229 | $ | 107 | $ | - | $ | 143,478 | ||||||||||
Commercial real estate | 241,477 | 830 | 553 | - | 242,860 | |||||||||||||||
Construction, land acquisition and development | 17,766 | 346 | - | - | 18,112 | |||||||||||||||
Total real estate | 402,385 | 1,405 | 660 | - | 404,450 | |||||||||||||||
Commercial and industrial | 150,378 | 307 | 9 | - | 150,694 | |||||||||||||||
Consumer | 126,341 | 1,030 | 300 | - | 127,671 | |||||||||||||||
State and political subdivisions | 43,709 | - | - | - | 43,709 | |||||||||||||||
Total peforming (accruing) loans | 722,813 | 2,742 | 969 | - | 726,524 | |||||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential real estate | 176 | 202 | 17 | 387 | 782 | |||||||||||||||
Commercial real estate | 201 | 23 | - | 746 | 970 | |||||||||||||||
Construction, land acquisition and development | - | 245 | - | - | 245 | |||||||||||||||
Total real estate | 377 | 470 | 17 | 1,133 | 1,997 | |||||||||||||||
Commercial and industrial | - | - | - | 64 | 64 | |||||||||||||||
Consumer | 56 | 25 | 2 | 90 | 173 | |||||||||||||||
State and political subdivisions | - | - | - | - | - | |||||||||||||||
Total non-accrual loans | 433 | 495 | 19 | 1,287 | 2,234 | |||||||||||||||
Total loans receivable | $ | 723,246 | $ | 3,237 | $ | 988 | $ | 1,287 | $ | 728,758 |
The following tables present a distribution of the recorded investment, unpaid principal balance and the related allowance for FNCB’s impaired loans, which have been analyzed for impairment under ASC 310, at September 30, 2017 2019and December 31, 2016. 2018. Non-accrual loans, other than TDRs, with balances less than the $100$100 thousand loan relationship threshold are not evaluated individually for impairment and accordingly, are not included in the following tables. However, these loans are evaluated collectively for impairment as homogenoushomogeneous pools in the general allowance under ASC Topic 450. Total non-accrual loans, other than TDRs, with balances less than the $100$100 thousand loan relationship threshold that were evaluated under ASC Topic 450 amounted to $0.6 $0.9million at September 30, 2017 2019and $0.8$0.7 million at December 31, 2016.2018.
September 30, 2017 | September 30, 2019 | |||||||||||||||||||||||
Unpaid | Unpaid | |||||||||||||||||||||||
Recorded | Principal | Related | Recorded | Principal | Related | |||||||||||||||||||
(in thousands) | Investment | Balance | Allowance | Investment | Balance | Allowance | ||||||||||||||||||
With no allowance recorded: | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Residential real estate | $ | 220 | $ | 281 | $ | - | $ | 714 | $ | 777 | $ | - | ||||||||||||
Commercial real estate | 5,233 | 5,302 | - | 6,328 | 7,717 | - | ||||||||||||||||||
Construction, land acquisition and development | 86 | 86 | - | 78 | 78 | - | ||||||||||||||||||
Total real estate | 5,539 | 5,669 | - | |||||||||||||||||||||
Commercial and industrial | 21 | 53 | - | 675 | 880 | - | ||||||||||||||||||
Consumer | 30 | 30 | - | 24 | 26 | - | ||||||||||||||||||
�� | ||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total impaired loans with no related allowance recorded | 5,590 | 5,752 | - | 7,819 | 9,478 | - | ||||||||||||||||||
With a related allowance recorded: | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Residential real estate | 1,569 | 1,569 | 7 | 1,924 | 1,924 | 25 | ||||||||||||||||||
Commercial real estate | 3,023 | 3,023 | 163 | 3,055 | 3,774 | 228 | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | ||||||||||||||||||
Total real estate | 4,592 | 4,592 | 170 | |||||||||||||||||||||
Commercial and industrial | 774 | 774 | 600 | 58 | 658 | 38 | ||||||||||||||||||
Consumer | 367 | 367 | 2 | 173 | 173 | 1 | ||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total impaired loans with a related allowance recorded | 5,733 | 5,733 | 772 | 5,210 | 6,529 | 292 | ||||||||||||||||||
Total impaired loans: | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Residential real estate | 1,789 | 1,850 | 7 | 2,638 | 2,701 | 25 | ||||||||||||||||||
Commercial real estate | 8,256 | 8,325 | 163 | 9,383 | 11,491 | 228 | ||||||||||||||||||
Construction, land acquisition and development | 86 | 86 | - | 78 | 78 | - | ||||||||||||||||||
Total real estate | 10,131 | 10,261 | 170 | |||||||||||||||||||||
Commercial and industrial | 795 | 827 | 600 | 733 | 1,538 | 38 | ||||||||||||||||||
Consumer | 397 | 397 | 2 | 197 | 199 | 1 | ||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total impaired loans | $ | 11,323 | $ | 11,485 | $ | 772 | $ | 13,029 | $ | 16,007 | $ | 292 |
December 31, 2016 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
(in thousands) | Investment | Balance | Allowance | |||||||||
With no allowance recorded: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | $ | 386 | $ | 477 | $ | - | ||||||
Commercial real estate | 1,066 | 1,143 | - | |||||||||
Construction, land acquisition and development | 350 | 766 | - | |||||||||
Total real estate | 1,802 | 2,386 | - | |||||||||
Commercial and industrial | 73 | 105 | - | |||||||||
Consumer | - | - | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with no related allowance recorded | 1,875 | 2,491 | - | |||||||||
With a related allowance recorded: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | 1,543 | 1,543 | 29 | |||||||||
Commercial real estate | 1,871 | 1,871 | 254 | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Total real estate | 3,414 | 3,414 | 283 | |||||||||
Commercial and industrial | 18 | 18 | 18 | |||||||||
Consumer | 297 | 297 | 1 | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with a related allowance recorded | 3,729 | 3,729 | 302 | |||||||||
Total impaired loans: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | 1,929 | 2,020 | 29 | |||||||||
Commercial real estate | 2,937 | 3,014 | 254 | |||||||||
Construction, land acquisition and development | 350 | 766 | - | |||||||||
Total real estate | 5,216 | 5,800 | 283 | |||||||||
Commercial and industrial | 91 | 123 | 18 | |||||||||
Consumer | 297 | 297 | 1 | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans | $ | 5,604 | $ | 6,220 | $ | 302 |
December 31, 2018 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
(in thousands) | Investment | Balance | Allowance | |||||||||
With no allowance recorded: | ||||||||||||
Residential real estate | $ | 313 | $ | 375 | $ | - | ||||||
Commercial real estate | 7,149 | 8,795 | - | |||||||||
Construction, land acquisition and development | 82 | 82 | - | |||||||||
Commercial and industrial | - | - | - | |||||||||
Consumer | 26 | 28 | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with no related allowance recorded | 7,570 | 9,280 | - | |||||||||
With a related allowance recorded: | ||||||||||||
Residential real estate | 1,534 | 1,534 | 14 | |||||||||
Commercial real estate | 2,259 | 2,259 | 41 | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Commercial and industrial | 697 | 697 | 600 | |||||||||
Consumer | 357 | 357 | 2 | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with a related allowance recorded | 4,847 | 4,847 | 657 | |||||||||
Total impaired loans: | ||||||||||||
Residential real estate | 1,847 | 1,909 | 14 | |||||||||
Commercial real estate | 9,408 | 11,054 | 41 | |||||||||
Construction, land acquisition and development | 82 | 82 | - | |||||||||
Commercial and industrial | 697 | 697 | 600 | |||||||||
Consumer | 383 | 385 | 2 | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans | $ | 12,417 | $ | 14,127 | $ | 657 |
The following table presents the average balance and interest income by loan category recognized on impairedimpaired loans for the three and nine months ended September 30, 2017 2019and 2016:2018:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
(in thousands) | Average Balance | Interest Income (1) | Average Balance | Interest Income (1) | Average Balance | Interest Income (1) | Average Balance | Interest Income (1) | ||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||
Residential real estate | $ | 1,815 | $ | 21 | $ | 1,933 | $ | 21 | $ | 1,828 | $ | 63 | $ | 2,416 | $ | 69 | ||||||||||||||||
Commercial real estate | 8,431 | 82 | 2,835 | 23 | 7,941 | 194 | 3,476 | 69 | ||||||||||||||||||||||||
Construction, land acquisition and development | 86 | 1 | 379 | 1 | 87 | 3 | 452 | 5 | ||||||||||||||||||||||||
Total real estate | 10,332 | 104 | 5,147 | 45 | 9,856 | 260 | 6,344 | 143 | ||||||||||||||||||||||||
Commercial and industrial | 1,212 | 1 | 196 | - | 1,136 | 15 | 315 | 2 | ||||||||||||||||||||||||
Consumer | 328 | 3 | 299 | 1 | 329 | 9 | 301 | 7 | ||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total impaired loans | $ | 11,872 | $ | 108 | $ | 5,642 | $ | 46 | $ | 11,321 | $ | 284 | $ | 6,960 | $ | 152 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||
Average | Interest | Average | Interest | Average | Interest | Average | Interest | |||||||||||||||||||||||||
(in thousands) | Balance | Income (1) | Balance | Income (1) | Balance | Income (1) | Balance | Income (1) | ||||||||||||||||||||||||
Residential real estate | $ | 2,193 | $ | 21 | $ | 1,783 | $ | 21 | $ | 1,970 | $ | 62 | $ | 1,819 | $ | 63 | ||||||||||||||||
Commercial real estate | 9,012 | 73 | 9,296 | 79 | 9,290 | 226 | 8,320 | 231 | ||||||||||||||||||||||||
Construction, land acquisition and development | 78 | 1 | 83 | 1 | 80 | 4 | 84 | 3 | ||||||||||||||||||||||||
Commercial and industrial | 861 | - | 752 | - | 1,082 | 1 | 780 | 1 | ||||||||||||||||||||||||
Consumer | 198 | 2 | 386 | 5 | 259 | 9 | 389 | 12 | ||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total impaired loans | $ | 12,342 | $ | 97 | $ | 12,300 | $ | 106 | $ | 12,681 | $ | 302 | $ | 11,392 | $ | 310 |
|
The additional interest income that would have been earned on non-accrual and restructured loans had these loans performed in accordance with their original terms approximated $50$90 thousand and $116$267 thousand, respectively for the three and nine months ended September 30, 2019and $65 thousand and $150 thousand, respectively, for the three and nine months ended September 30, 2017, respectively, and $48 thousand and $175 thousand for the three and nine months ended September 30, 2016.2018.
Troubled Debt Restructured Loans
TDRs at September 30, 2017 2019and December 31, 2016 2018were $10.2$8.1 million and $4.3$9.2 million, respectively. Accruing and non-accruing TDRs were $9.3$7.8 million and $0.9$0.3 million, respectively, at September 30, 2017, 2019, and $4.2$8.5 million and $0.1$0.7 million, respectively, at December 31, 2016. 2018. Approximately $772$123 thousand and $261$651 thousand in specific reserves have been established for TDRs as of September 30, 2017 2019and December 31, 2016, 2018, respectively. FNCB was not committed to lend additional funds to any loan classified as a TDR at September 30, 2017.2019.
The modification of the terms of such loans classified as TDRs may include one or a combination of the following, among others: a reduction of the stated interest rate of the loan, an extension of the maturity date, capitalization of real estate taxes, a payment modification under a forbearance agreement, or a permanent reduction of the recorded investment in the loan.
The following tables showtables present the pre- and post-modification recorded investment in loans modified as TDRs by type of modification for the three and nine months ended September 30, 2019.
Three months ended September 30, 2019 | ||||||||||||||||||||||||
Pre-Modification Outstanding Recorded Investment by Type of Modification | ||||||||||||||||||||||||
(in thousands) | Number of Contracts | Forbearance | Extension of Terms | Capitalization of Taxes | Total | Post-Modification Outstanding Recorded Investment | ||||||||||||||||||
Types of modification: | ||||||||||||||||||||||||
Residential real estate | 3 | $ | 208 | - | $ | 42 | $ | 250 | $ | 261 | ||||||||||||||
Commercial real estate | - | - | - | - | - | - | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | - | - | - | - | - | - | ||||||||||||||||||
Consumer | - | - | - | - | - | - | ||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total modifications | 3 | $ | 208 | $ | - | $ | 42 | $ | 250 | $ | 261 |
Nine months ended September 30, 2019 | ||||||||||||||||||||||||
Pre-Modification Outstanding Recorded Investment by Type of Modification | ||||||||||||||||||||||||
(in thousands) | Number of Contracts | Forbearance | Extension of Terms | Capitalization of Taxes | Total | Post-Modification Outstanding Recorded Investment | ||||||||||||||||||
Types of modification: | ||||||||||||||||||||||||
Residential real estate | 4 | $ | 208 | 24 | $ | 42 | $ | 274 | $ | 285 | ||||||||||||||
Commercial real estate | - | - | - | - | - | - | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | - | - | - | - | - | - | ||||||||||||||||||
Consumer | - | - | - | - | - | - | ||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total modifications | 4 | $ | 208 | $ | 24 | $ | 42 | $ | 274 | $ | 285 |
There were no loans modified as a TDR during the three and nine months ended September 30, 2017 and 2016.
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
(dollars in thousands) | Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Residential real estate | - | $ | - | $ | - | 1 | $ | 63 | $ | 63 | ||||||||||||||
Commercial real estate | - | - | - | 8 | 5,250 | 5,250 | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | - | - | - | 4 | 1,845 | 1,845 | ||||||||||||||||||
Consumer | 2 | 85 | 104 | 2 | 85 | 104 | ||||||||||||||||||
States and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total new troubled debt restructurings | 2 | $ | 85 | $ | 104 | 15 | $ | 7,243 | $ | 7,262 |
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
(dollars in thousands) | Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Residential real estate | 1 | $ | 95 | $ | 99 | 1 | $ | 95 | $ | 99 | ||||||||||||||
Commercial real estate | - | - | - | - | - | - | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | - | - | - | - | - | - | ||||||||||||||||||
Consumer | - | - | - | - | - | - | ||||||||||||||||||
States and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total new troubled debt restructurings | 1 | $ | 95 | $ | 99 | 1 | $ | 95 | $ | 99 |
The following table presents the types of modifications made during the three and nine months ended September 30, 2017 and 2016:
Three months ended September 30, 2017 | Nine months ended September 30, 2017 | |||||||||||||||||||||||||||||||||||||||
(in thousands) | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total Modifications | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total Modifications | ||||||||||||||||||||||||||||||
Types of modification: | ||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 63 | $ | - | $ | - | $ | - | $ | 63 | ||||||||||||||||||||
Commercial real estate | - | - | - | - | - | - | - | - | 5,250 | 5,250 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Commercial and industrial | - | - | - | - | - | - | - | 25 | 1,820 | 1,845 | ||||||||||||||||||||||||||||||
Consumer | - | 85 | - | - | 85 | - | 85 | - | - | 85 | ||||||||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total modifications | $ | - | $ | 85 | $ | - | $ | - | $ | 85 | $ | 63 | $ | 85 | $ | 25 | $ | 7,070 | $ | 7,243 |
Three months ended September 30, 2016 | Nine months ended September 30, 2016 | |||||||||||||||||||||||||||||||||||||||
(in thousands) | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total Modifications | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total Modifications | ||||||||||||||||||||||||||||||
Types of modification: | ||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | - | $ | 95 | $ | - | $ | - | $ | 95 | $ | - | $ | 95 | $ | - | $ | - | $ | 95 | ||||||||||||||||||||
Commercial real estate | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Commercial and industrial | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total modifications | $ | - | $ | 95 | $ | - | $ | - | $ | 95 | $ | - | $ | 95 | $ | - | $ | - | $ | 95 |
2018. There were eight loan relationshipsno loans modified as TDRsa TDR within the previous 12 months that subsequently defaulted, defined as 90 days or more past due, during the nine months ended September 30, 2017, which incorporated a total of fifteen individual loans. 2019 and 2018.
Residential Real Estate Loan Foreclosures
There were three loan relationships, comprisedtwo consumer mortgage loans with an aggregate recorded investment of eight commercial$154 thousand secured by residential real estate loans totaling $5.3 million, and two loan relationships, comprisedproperties in the process of four commercial and industrial loans totaling $1.8 million,foreclosure at September 30, 2019. There was one investor-owned residential real estate property with an aggregate carrying value of $204 thousand that were modified under varying forms of forbearance agreementswas foreclosed upon during thethree and nine months ended September 30, 2017. Additional TDRs included two consumer loans totaling $85 thousand that had their terms extended and delinquent taxes capitalized, as well as one residential real estate loan in the amount of $63 thousand that had its terms extended. The commercial real estate modifications included a principal forbearance agreement for one loan in the amount of $4.0 million and reductions in required monthly principal payments resulting in balloon payments due at maturity for seven loans to two borrowers aggregating $1.2 million. The four commercial and industrial loan modifications involved the delay of required principal and interest payments for predefined time periods. In addition, a charge-off in the amount of $0.3 million was recorded as part of the modification of three commercial and industrial loans aggregating $1.8 million to one borrower. During the third quarter of 2017, two of the four commercial and industrial loans totaling $0.8 million were paid off. All remaining loans modified during the nine months ended September 30, 2017 are performing in accordance with their respective modified terms.
The following table presents the number and recorded investment of TDRs that were modified within the previous 12 months which have defaulted (defined as past due 90 days or more) during the nine months ended September 30, 2017 and 2016:
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number of | Recorded | Number of | Recorded | |||||||||||||
(dollars in thousands) | Contracts | Investment | Contracts | Investment | ||||||||||||
Troubled debt restructurings: | ||||||||||||||||
Residential real estate | - | $ | - | 3 | $ | 145 | ||||||||||
Commercial real estate | - | - | 1 | 680 | ||||||||||||
Construction, land acquisition and development | 1 | 10 | - | - | ||||||||||||
Commercial and industrial | - | - | - | - | ||||||||||||
Consumer | - | - | - | - | ||||||||||||
State and political subdivisions | - | - | - | - | ||||||||||||
Total TDR defaults | 1 | $ | 10 | 4 | $ | 825 |
There were no TDRs that were modified within the previous 12 months which defaulted during the three months ended September 30, 2017 and 2016. 2019. For the nine months ended September 30, 2016, one of the three2019, there were two residential real estate TDRs that defaulted suffered a decline in collateralproperties with an aggregate carrying value which resulted in a charge against the ALLL of $37 thousand. The one commercial real estate loan that defaulted during the nine months ended September 30, 2016 was$256 thousand foreclosed upon and transferred toincluded in OREO during the third quarter of 2016.
Residential Real Estate Loan Foreclosuresat September 30, 2019.
There were two fourconsumer mortgage loans secured by residential real estate properties with an aggregate recorded investment of $14$20 thousand that were in the process of foreclosure at September 30, 2017. There were no residential real estate properties that were foreclosed upon during2018. For the three months ended September 30, 2017. For theand nine months ended September 30, 2017,2018, there were twono residential real estate properties with an aggregate carrying value of $125 thousand that were foreclosed upon. Of the two loans foreclosed upon, during the nine months ended September 30, 2017, one was an investor-owned residential real estate property with a current carrying value of $30 thousand. Thereand there was one residential real estate property with a carrying value of $237 thousand that was foreclosed upon during the nine months ended September 30, 2016.
There were four residential real estate properties with an aggregate carrying value of $149$59 thousand included in OREO at September 30, 2017, and two residential real estate properties with an aggregate carrying value of $41 thousand included in OREO at December 31, 2016.2018.
|
|
The following table presents deposits by major category at September 30, 2017 and December 31, 2016:
September 30, | December 31, | |||||||
(in thousands) | 2017 | 2016 | ||||||
Demand (non-interest bearing) | $ | 162,426 | $ | 173,702 | ||||
Interest-bearing: | ||||||||
Interest-bearing demand | 520,512 | 551,114 | ||||||
Savings | 101,755 | 103,241 | ||||||
Time ($250,000 and over) | 42,094 | 35,917 | ||||||
Other time | 156,425 | 151,165 | ||||||
Total interest-bearing | 820,786 | 841,437 | ||||||
Total deposits | $ | 983,212 | $ | 1,015,139 |
Total deposits decreased $31.9 million to $983.2 million at September 30, 2017 from $1.015 billion at December 31, 2016. Non-interest-bearing deposits decreased $11.3 million to $162.4 million at September 30, 2017 from $173.7 million at December 31, 2016. Interest-bearing deposits decreased $20.6 million to $820.8 million at September 30, 2017 from $841.4 million at December 31, 2016. The decrease in non-interest-bearing deposits was primarily due to movements in the balances of larger commercial deposit relationships. The decrease in interest-bearing deposits was primarily due to the anticipated exit of short-term funds related to the sale of a municipal utility deposited in December 2016, and normal cyclical deposit trends of public depositors.Note 5. Income Taxes
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|
The following table presents a reconciliation between the effective income tax expense and the incomeincome tax expense that would have been provided at the federal statutory tax rate of 34.0%21.0% for the three and nine months ended September 30, 20172019 and 2016:2018, respectively.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision at statutory tax rates | $ | 1,054 | 34.00 | % | $ | 932 | 34.00 | % | $ | 2,994 | 34.00 | % | $ | 2,175 | 34.00 | % | $ | 612 | 21.00 | % | $ | 471 | 21.00 | % | $ | 1,925 | 21.00 | % | $ | 1,597 | 21.00 | % | ||||||||||||||||||||||||||||||||
Add (deduct): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax effects of non-taxable income | (108 | ) | (3.48 | %) | (121 | ) | (4.42 | %) | (342 | ) | (3.88 | %) | (374 | ) | (5.85 | %) | ||||||||||||||||||||||||||||||||||||||||||||||||
Tax effects of tax free interest income | (75 | ) | (2.57 | )% | (101 | ) | (4.52 | )% | (259 | ) | (2.82 | )% | (271 | ) | (3.57 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-deductible interest expense | 3 | 0.11 | % | 2 | 0.07 | % | 9 | 0.10 | % | 7 | 0.11 | % | 4 | 0.13 | % | 4 | 0.20 | % | 11 | 0.12 | % | 10 | 0.14 | % | ||||||||||||||||||||||||||||||||||||||||
Bank-owned life insurance | (44 | ) | (1.41 | %) | (47 | ) | (1.70 | %) | (136 | ) | (1.54 | %) | (145 | ) | (2.27 | %) | (28 | ) | (0.96 | )% | (30 | ) | (1.33 | )% | (83 | ) | (0.91 | )% | (87 | ) | (1.14 | )% | ||||||||||||||||||||||||||||||||
Change in valuation allowance | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | (8 | ) | (0.13 | %) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other items, net | (78 | ) | (2.53 | %) | (42 | ) | (1.54 | %) | 18 | 0.20 | % | (44 | ) | (0.68 | %) | - | 0.00 | % | 44 | 1.99 | % | (12 | ) | (0.13 | )% | 73 | 0.96 | % | ||||||||||||||||||||||||||||||||||||
Income tax expense | $ | 827 | 26.69 | % | $ | 724 | 26.41 | % | $ | 2,543 | 28.88 | % | $ | 1,611 | 25.19 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Income tax provision | $ | 513 | 17.60 | % | $ | 388 | 17.34 | % | $ | 1,582 | 17.26 | % | $ | 1,322 | 17.39 | % |
As of December 31, 2016, FNCB had $50.4 million of net operating loss carryovers resulting in deferred tax assets of $17.1 million. Beginning$6.7 million at September 30, 2019, of which $4.7 million was related to approximately $30.0 million in 2030, these net operating loss carryovers will expire if not utilized. As of carryovers. At December 31, 2016, FNCB also had $0.7 million of charitable contribution carryovers and $2.6 million in alternative minimum2018, FNCB’s net deferred tax (“AMT”) credit carryovers. The charitable contribution carryovers will begin to expire after December 31, 2017 if not utilized, while AMT credit carryovers have an indefinite life.assets were $10.7 million.
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently if necessary, in accordance with guidance set forth in ASC Topic 740 “Income Taxes,” and applies the criteria in the guidance to determine whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. In evaluating available evidence, management considers, among other factors, historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. In assessing the need for a valuation allowance, management carefully weighs both positive and negative evidence currently available. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. If management determines, based on available evidence, both positive and negative, that it is more likely than not that some portion or all of the deferred tax asset will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s estimates and judgments used in their evaluation of both positive and negative evidence.
Management performed an evaluation of FNCB’sFNCB’s deferred tax assets at September 30, 2017 and December 31, 2016 2019taking into consideration all available positive and negative evidence at that time. Based on this evaluation, management believes that FNCB’s future taxable income will be sufficient to utilize deferred tax assets. Accordingly, a valuation allowance for deferred tax assets was not required at September 30, 2017 2019and December 31, 2016.
FNCB uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. On September 27, 2017, the Trump Administration released a tax reform framework that includes a reduction in the U.S. corporate income tax rate to 20.0%2018. If corporate tax rates are reduced, management expects FNCB would be required to record an initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would record lower tax provisions on an ongoing basis. The House of Representatives is currently working on a draft of the bill, which is expected to be addressed by Congress later in 2017. It is too early to determine if any of the proposals on tax reform are actionable, or if acted upon, the specific tax reforms that would be implemented. Accordingly, management cannot assess the effect that any tax reform measure effectuated would have on FNCB’s operating results or financial position at the present time.
Note 76. Related Party Transactions
In conducting its business, FNCB has engaged in, and intends to continue to engage in, banking and financial transactions with directors, executive officers and their related parties.
FNCB has granted loans, letters of credit and lines of credit to directors, executive officers and their related parties. The following table summarizes the changes in the total amounts of such outstanding loans, advances under lines of credit, net of any participations sold, as well as repayments during the three and nine months ended September 30, 20172019 and 2016:2018.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Balance, beginning of period | $ | 41,425 | $ | 43,664 | $ | 42,007 | $ | 52,652 | ||||||||
Additions, new loans and advances | 30,971 | 3,492 | 67,743 | 10,704 | ||||||||||||
Repayments | (6,381 | ) | (2,115 | ) | (43,735 | ) | (18,294 | ) | ||||||||
Other (1) | - | (28 | ) | - | (49 | ) | ||||||||||
Balance, end of period | $ | 66,015 | $ | 45,013 | $ | 66,015 | $ | 45,013 |
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For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Balance, beginning of period | $ | 78,752 | $ | 69,826 | $ | 64,634 | $ | 55,576 | ||||||||
Additions, new loans and advances | 41,499 | 20,665 | 70,592 | 63,780 | ||||||||||||
Repayments | (25,484 | ) | (17,796 | ) | (40,459 | ) | (46,661 | ) | ||||||||
Balance, end of period | $ | 94,767 | $ | 72,695 | $ | 94,767 | $ | 72,695 |
At September 30, 2017, 2019, there were no loans made to directors, executive officers and their related parties that were not performing in accordance with the terms of the loan agreements. As of December 31, 2016, there was one loan relationship aggregating $381 thousand to a business partially owned by a director that had been classified as “Special Mention”. Management had classified the loan relationship as Special Mention strictly because FNCB had not received current financial information from a non-related party to the loan agreements. As of September 30, 2017, the required updated financial information had been received, and the loan relationship was no longer criticized.
On September 27, 2017, the Board of Directors of FNCB elected three new directors to the Board of Directors. The addition of the three directors and their related parties contributed $22.8 million of the additions, new loans and advances during the three and nine months ended September 30, 2017.
Deposits from directors, executive officers and their related parties held by the Bank at September 30, 2017 2019and December 31, 20162018 amounted to $103.8$95.0 million and $119.3$115.5 million, respectively.respectively, a decrease of $20.5 million. The decrease was due to cyclical outflows from several large commercial deposit relationships that are owned by, or a related party to, certain directors. Interest paid on the deposits amounted to $209$366 thousand and $143$255 thousand respectively, for the nine months ended on September 30, 20172019 and 2016.2018, respectively.
In the course of its operations, FNCB acquires goods and services from, and transacts business with,, various companies of related parties, which include, but are not limited to, employee health insurance, fidelity bond and errors and omissions insurance, legal services, and repair of repossessed automobiles for resale. FNCB recorded payments to related parties for goods and services of $1.0 $0.6million and $2.1$1.6 million for the three and nine months ended September 30, 2017,2019, respectively, and $1.0$0.7 million and $1.9$1.7 million for the respective periods of 2016.2018.
On February 8, 2019, FNCB accelerated the final $5.0 million principal repayment, which was due and payable on September 1, 2019, along with all accrued interest, of which $3.1 million was paid to directors and/or their related interests. Subordinated notes (the “Notes”) held by directors and/or their related parties totaled $3.1 million at September 30, 2017 and $6.2 million at December 31, 2016. During2018. Interest expense recorded and paid on the Notes for directors and/or their related parties through February 8, 2019, the date of final payment, was $27 thousand. Regular quarterly interest payments on the Notes paid by FNCB to its directors and/or their related parties totaled$36 thousand and $106thousand for the three and nine months ended September 30, 2017,2018, respectively.
On January 28, 2019, FNCB paidcommenced a public offering of shares of its common stock in a firm commitment underwritten offering. The offering closed on February 8, 2019 and FNCB issued 3,285,550 shares of its common stock at an offering price of $7.00 per share. Shares acquired by directors, executive officers and their related parties as part of this offering were 340,600, or 10.4%, of the quarterly interesttotal common shares issued. For more information about the public offering, refer to Note 9, “Regulatory Matters/Subsequent Event” to these consolidated financial statements.
Note 7. Commitments and Contingencies
Leases
FNCB is obligated under operating leases for certain bank branches, office space, automobiles and equipment. Operating lease right of use ("ROU") assets represent FNCB's right to use an underlying asset during the lease term and operating liabilities represent our obligation to make lease payments dueunder the lease agreement. ROU assets and operating lease liabilities are recognized at lease commencement based on the Notes forpresent value of the periodremaining lease payments using a discount rate that represents FNCB's incremental borrowing rate at the commencement date. ROU assets are included in other assets and operating lease liabilities are included in other liabilities in the consolidated statements of December 1, 2016 through August 31, 2017, totaling $343 thousand,financial condition. As of which $211 thousand was paid to directors and/or their related interests. DuringSeptember 30, 2019 ROU assets and lease liabilities were $ 3.2 million and $3.5 million, respectively. There were three new automobile and equipment operating leases that commenced during the nine months ended September 30, 2016, FNCB paid the quarterly interest payments due on the Notes2019 ROU assets and corresponding lease liabilities recorded for the period of December 1, 2015 through August 31, 2016, totaling $481new leases aggregated $78 thousand of which $296 thousand was paid to directors and/or their related interests. Also during the nine months ended September 30, 2016, FNCB paid all previously deferred and accrued interest on2019.
The following table summarizes the Notescomponents of FNCB's operating lease expense for the period three and nine months ended September 1, 2010 through May 31, 2015, which totaled $10.8 million, of which $3.9 million was paid to directors and/or their related interests.
On July 27, 2017, the Board of Directors approved the acceleration of a partial principal repayment30, 2019. Operating lease expense associated with bank branches and office space is included in occupancy expense, while operating lease expense associated with automobiles and office equipment are included in equipment expense in the amountconsolidated statements of $5.0 million on Notes, of which $3.1 million was repaid to directors and/or their related parties. This principal repayment, which was originally due and payable on September 1, 2018, was paid to Noteholders on September 1, 2017.income.
(in thousands) | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | ||||||
Operating lease cost - bank branches | $ | 86 | $ | 257 | ||||
Operating lease cost - automobiles and equipment | 8 | 16 | ||||||
Short-term lease cost - office space | 9 | 33 | ||||||
Short-term lease cost - automobiles and equipment | 1 | 6 | ||||||
Variable lease cost | - | - | ||||||
Total lease cost | $ | 104 | $ | 312 |
The following table summarizes the maturity of remaining operating lease liabilities as of September 30, 2019:
(in thousands) | September 30, 2019 | |||
2019 | $ | 88 | ||
2020 | 382 | |||
2021 | 347 | |||
2022 | 327 | |||
2023 | 323 | |||
2024 and thereafter | 3,100 | |||
Total lease payments | 4,567 | |||
Less: imputed interest | 1,047 | |||
Present value of operating lease liabilities | $ | 3,520 |
The following table presents other information related to our operating leases:
(dollars in thousands) | September 30, 2019 | |||
Weighted-average remaining lease term | 14.6 years | |||
Weighted-average discount rate | 3.43 | % | ||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 290 |
Litigation |
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On May 24, 2012, a putative shareholder filed a complaint in the Court of Common Pleas for Lackawanna County (“Shareholder Derivative Suit”) against certain present and former directors and officers of FNCB (the “Individual Defendants”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste, and unjust enrichment. FNCB was named as a nominal defendant. On February 4, 2014, the Court issued a Final Order and Judgment for the matter granting approval of a Stipulation of Settlement (the “Settlement”) and dismissing all claims against FNCB and the Individual Defendants. As part of the Settlement, without admitting any fault, wrongdoing or liability, the Individual Defendants agreed to settle the derivative litigation for $5.0 million. The $5.0 million Settlement payment was made to FNCB on March 28, 2014. The Individual Defendants reserved their rights to indemnification under FNCB’sFNCB’s Articles of Incorporation and Bylaws, resolutions adopted by the Board, the Pennsylvania Business Corporation Law and any and all rights they have against FNCB’s and the Bank’s insurance carriers. In addition, in conjunction with the Settlement, FNCB accrued $2.5 million related to fees and costs of the plaintiff’s attorneys, which was included in non-interest expense in the consolidated statements of income for the year ended December 31, 2013. On April 1, 2014, FNCB paid the $2.5 million related to fees and costs of the plaintiff’s attorneys and partial indemnification of the Individual Defendants in the amount of $2.5 million. OnCommencing on July 1, 2017, FNCB continued to makemade partial indemnificationindemnifications to the Individual Defendants by commencingthrough monthly principal payments, made on behalf of the Individual Defendants, of $25,000 plus accrued interest due to First Northern Bank and Trust Co. As of September 30, 2017,On April 11, 2018, FNCB indemnified the Individual Defendants by paying in full the $2.5 million, plus accrued interest remains accrued in other liabilities related to the potential indemnification of the Individual Defendants.First Northern Bank & Trust Co.
On September 5, 2012, Fidelity and Deposit Company of Maryland (“F&D”) filed an action against FNCB and the Bank, as well as several current and former officers and directors of FNCB, in the United States District Court for the Middle District of Pennsylvania. F&D has asserted a claim for the rescission of a directors’directors’ and officers’ insurance policy and a bond that it had issued to FNCB. On November 9, 2012, FNCB and the Bank answered the claim and asserted counterclaims for the losses and expenses already incurred by FNCB and the Bank. FNCB and the other defendants are defendingdefended the claims and have opposed F&D’s requested relief by way of counterclaims, breaches of contract and bad faith claims against F&D for its failure to fulfill its obligations tocounterclaims. On December 21, 2018, FNCB, and the Bank underand F&D resolved the insurance policy. Discovery is complete anddispute by entering into a mutual release of all claims. FNCB recognized a gain of $6.0 million after expenses in the parties have exchanged expert reports. Dispositive motions have been submitted by the parties and the Court heard oral arguments on the motions on August 9, 2017. At this time, FNCB cannot reasonably determine the outcomefourth quarter of potential range of loss, if any,2018 in connection with this matter.
On February 16, 2017, FNCB and the Bank entered into a Class Action Settlement Agreement and Release (the “Settlement Agreement”) in the matters filed in the Court of Common Pleas of Lackawanna County to Steven Antonik, Individually, and as Administrator of the Estate of Linda Kluska, William R. Howells and Louise A. Howells, Summer Benjamin, and Joshua Silfee, on behalf of themselves and all other similarly situated vs. First National Community Bancorp, Inc. and First National Community Bank, Civil Action No. 2013-CV-4438 and Charles Saxe, III, Individually and on behalf of all others similarly situated vs. First National Community Bank No. 2013-CV-5071 (collectively, the “Actions”). By entering into this Settlement Agreement, the parties to the Actions have resolved the claims made in the complaints to their mutual satisfaction. FNCB has not admitted to the validity of any claims or allegations and denies any liability in the claims made and the Plaintiffs have not admitted that any claims or allegations lack merit or foundation. Under the terms of the Settlement Agreement, the parties have agreed to the following: 1) FNCB is to pay the Plaintiffs’ class members the aggregate sum of Seven Hundred Fifty Thousand Dollars ($750,000) (an amount which FNCB recorded as a liability and corresponding expense in its 2015 operating results); 2) Plaintiffs shall release all claims against FNCB related to the Actions; 3) FNCB shall move to vacate or satisfy any judgments against any class members arising from the vehicle loans that are the subject of the Actions; and 4) FNCB shall waive the deficiency balance of each class member and remove the trade lines on each class members’ credit report associated with the subject vehicle loans that are at issue in the Actions for Experian, Equifax, and Transunion. The Settlement Agreement provides for an Incentive Award for the representative Plaintiffs and an award to Plaintiffs’ counsel of attorney’s fees and reimbursement of expenses in connection with their roles in these Actions, subject to Court approval. The Settlement Agreement was approved by Court Order on May 31, 2017. On March 2, 2017 FNCB paid the Settlement Administrator $750,000 pursuant to the terms and conditions of the Settlement Agreement. Additionally, in association with the subject vehicle loans, FNCB has completed the removal of trade lines on each class members' credit report and has substantially completed satisfying judgments, where applicable, in favor of class members. As previously mentioned above and in connection with the primary terms of the tentative settlement agreement entered by Order of Court on December 17, 2015, FNCB recorded a liability and corresponding expense in the amount of Seven Hundred Fifty Thousand ($750,000), which was included in FNCB’s 2015 operating results.insurance recovery.
FNCB has been subject to tax audits,, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims, workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of FNCB.
There have been no changes in the status of the other litigation, if any, disclosed in FNCB’s Annual Report on Form 10-K for the year ended December 31, 2016.
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FNCB had an Employee Stock Incentive Plan (the “Stock Incentive Plan”), where options were granted to key officers and other employees of FNCB. The aggregate number of shares authorized to be issued upon exercise of the options under the Stock Incentive Plan could not exceed 1,100,000 shares. Options and rights granted under the Stock Incentive Plan became exercisable six months after the date the options were awarded and expire ten years after the award date. Upon exercise, the shares are issued from FNCB’s authorized but unissued stock. The Stock Incentive Plan expired on August 30, 2010. Accordingly, no further grants have been, or will be, made under the Stock Incentive Plan. No compensation expense related to options under the Stock Incentive Plan was required to be recorded in the three and nine months ended September 30, 2017 and 2016.
During the nine months ended September 30, 2017, 6,500 options outstanding under the Stock Incentive Plan were forfeited at a weighted average price outstanding of $13.15. As of September 30, 2017, 31,200 options remain outstanding and exercisable at a weighted average price of $13.15. There have been no other changes to the status of FNCB’s Stock Incentive Plan as of, or for the nine months ended, September 30, 2017. For additional information related to the Stock Incentive Plan, refer to Note 13 to the consolidated financial statements included in FNCB’s Annual Report on Form 10-K10-K for the year ended December 31, 2016.2018.
Note 8. Stock Compensation Plans
FNCB has a Long-Term Incentive Compensation Plan (“LTIP”) for directors, executives and key employees. The LTIP authorizes up to 1,200,000 shares of common stock for issuance and provides the Board of Directors with the authority to offer several different types of long-term incentives, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares. During the nine months ended September 30, 20172019 and 2016,2018, the Board of Directors granted 54,54957,684 and 67,60057,829 shares of restricted stock, respectively, under the LTIP. At September 30, 2017, 2019, there were 977,619 852,120shares of common stock available for award under the LTIP. For the nine months ended September 30, 20172019 and 2016,2018, stock-based compensation expense, which is included in salaries and employee benefits expense in the consolidated statements of income, totaled $234$196 thousand and $195$215 thousand, respectively. Total unrecognized compensation expense related to unvested restricted stock awards was $539$869 thousand and $468$745 thousand at September 30, 2017 2019and 2016,2018, respectively. Unrecognized compensation expense related to unvested shares of restricted stock is expected to be recognized over a weighted-average period of 3.9 years.
On July 1, 2019, 1,956 shares of FNCB's common stock were granted, under the LTIP, to each of FNCB Bank's ten non-employee directors or 19,560 shares in the aggregate. The shares of common stock immediately vested to each director upon grant, and the fair value of the shares on the grant date was $7.67 per share. Directors fees totaling $150 thousand were recognized as part of this grant and included in director fees in the consolidated statements of income for the three and nine months ended September 30, 2019.
The following table summarizes the activity related to FNCB’sFNCB’s unvested restricted stock awards during the three and nine months ended September 30, 20172019 and 2016:2018:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | Weighted- | Weighted- | Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unvested, beginning of period | 106,495 | $ | 6.24 | 109,596 | $ | 5.75 | 103,874 | $ | 5.74 | 112,958 | $ | 5.99 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unvested restricted stock awards: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total outstanding, beginning of period | 134,047 | $ | 7.75 | 116,321 | $ | 7.50 | 114,702 | $ | 7.50 | 106,129 | $ | 6.23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Awards granted | - | - | - | - | 54,549 | 6.83 | 67,600 | 5.53 | - | - | - | - | 57,684 | 7.64 | 57,829 | 8.54 | ||||||||||||||||||||||||||||||||||||||||||||||||
Forfeitures | (366 | ) | 6.83 | (5,097 | ) | 5.94 | (5,416 | ) | 5.73 | (23,211 | ) | 5.69 | (5,897 | ) | 7.61 | (737 | ) | 7.93 | (6,678 | ) | 7.61 | (2,016 | ) | 7.26 | ||||||||||||||||||||||||||||||||||||||||
Vestings | - | - | - | - | (46,878 | ) | 5.90 | (52,848 | ) | 6.02 | - | - | - | - | (37,558 | ) | 6.80 | (46,358 | ) | 5.93 | ||||||||||||||||||||||||||||||||||||||||||||
Unvested, end of period | 106,129 | $ | 6.23 | 104,499 | $ | 5.74 | 106,129 | $ | 6.23 | 104,499 | $ | 5.74 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total outstanding, end of period | 128,150 | $ | 7.76 | 115,584 | $ | 7.49 | 128,150 | $ | 7.76 | 115,584 | $ | 7.49 |
Note 109.Regulatory Matters/Matters/Subsequent Event
On January 28, 2019, FNCB announced that it had commenced a public offering of shares of its common stock in a firm commitment underwritten offering. The offering closed on February 8, 2019 and FNCB issued 3,285,550 shares of its common stock, which included 428,550 shares issued upon the exercise in full of the option to purchase additional shares granted to underwriters, at an offering price of $7.00 per share, less an underwriting discount of $0.35 per share. FNCB received net proceeds after deducting the underwriting discount and offering expenses of $21.3 million. Following the receipt of the proceeds, during the first quarter of 2019, FNCB made a capital investment in FNCB Bank, its wholly-owned subsidiary of $17.8 million.
FNCB’sFNCB’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to FNCB. Bank regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. For the three and nine months ended September 30, 2017,2019, cash dividends declared and paid by FNCB were $0.03$0.05 per share and $0.09$0.15 per share, respectively, and $0.02$0.04 per share and $0.06$0.12 per share, respectively, for the same periods of 2016. On April 27, 2016, the Board of Directors approved the reinstatement of thethree and nine months ended September 30, 2018. FNCB offers a Dividend Reinvestment and Stock Purchase Plan (“DRP”) which became effective on June 1, 2016. Effective July 1, 2017,to its shareholders. For the three and nine months ended September 30, 2019 and 2018, dividend reinvestment shares acquired under the DRP were purchased in open market transactions. Previously, FNCB issuedtransactions, however shares under the optional cash purchase feature of the DRP were issued from authorized but unissued common shares. Accordingly, there were no common shares issued under the DRP during the three months ended September 30, 2017. Common shares issued under the DRP for the three and nine months ended September 30, 2017 totaled 65,240. Common shares issued under the DRP for the comparable periods of 2016 were 27,9881,907 and 47,763 shares, respectively. Additionally,5,453, respectively in 2019 and 1,915 and 15,150, respectively in 2018. Subsequent to September 30, 2019, on October 25, 2017, 30, 2019, FNCB declared a cash dividend for the fourth quarter of 20172019 of $0.04 $0.05per share, which is payable on December 15, 2017, 16, 2019 to shareholders of record as of December 1, 2017.December 2, 2019.
FNCB is and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. 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 adverse effect on FNCB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FNCB and the Bank must meet specific capital guidelines that involve quantitative measures of FNCB's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices must be met. Capitalpractices. FNCB's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of September 30, 2019, that FNCB and the Bank meet all applicable capital adequacy requirements.
Current quantitative measures established by regulation to ensure capital adequacy require FNCB to maintain minimum amounts and ratios (set forth in the tables below) of totalTotal capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).
TheThe following tables present summary information regarding FNCB’s and the Bank’s risk-based capital and related ratios at September 30, 2017 2019and December 31, 2016:2018:
Consolidated | Bank Only | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum To Be Well Capitalized Under Prompt Corrective Action Regulations* | Consolidated | Bank Only | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations* | |||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Ratio | Ratio | Ratio | Amount | Ratio | Amount | Ratio | Ratio | Ratio | Ratio | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 101,767 | 12.17 | % | $ | 105,545 | 12.65 | % | 8.00 | % | 9.25 | % | 10.00 | % | $ | 143,086 | 15.72 | % | $ | 139,579 | 15.37 | % | 8.00 | % | 10.50 | % | 10.00 | % | ||||||||||||||||||||||||||||
Tier I capital (to risk-weighted assets) | 90,132 | 10.78 | % | 96,410 | 11.55 | % | 6.00 | % | 7.25 | % | 8.00 | % | 133,272 | 14.64 | % | 129,765 | 14.29 | % | 6.00 | % | 8.50 | % | 8.00 | % | ||||||||||||||||||||||||||||||||
Tier I common equity (to risk-weighted assets) | 83,568 | 10.00 | % | 96,410 | 11.55 | % | 4.50 | % | 5.75 | % | 6.50 | % | 123,272 | 13.54 | % | 129,765 | 14.29 | % | 4.50 | % | 7.00 | % | 6.50 | % | ||||||||||||||||||||||||||||||||
Tier I capital (to average assets) | 90,132 | 8.10 | % | 96,410 | 8.67 | % | 4.00 | % | 4.00 | % | 5.00 | % | 133,272 | 11.27 | % | 129,765 | 11.01 | % | 4.00 | % | 4.00 | % | 5.00 | % | ||||||||||||||||||||||||||||||||
Total risk-weighted assets | 836,083 | 834,519 | 910,499 | 908,389 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total average assets | 1,112,539 | 1,112,246 | 1,182,383 | 1,178,564 |
Consolidated | Bank Only | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum To Be Well Capitalized Under Prompt Corrective Action Regulations* | ||||||||||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 96,827 | 12.06 | % | $ | 102,786 | 12.81 | % | 8.00 | % | 8.625 | % | 10.00 | % | ||||||||||||||
Tier I capital (to risk-weighted assets) | 82,159 | 10.23 | % | 94,118 | 11.73 | % | 6.00 | % | 6.625 | % | 8.00 | % | ||||||||||||||||
Tier I common equity (to risk-weighted assets) | 80,049 | 9.97 | % | 94,118 | 11.73 | % | 4.50 | % | 5.125 | % | 6.50 | % | ||||||||||||||||
Tier I capital (to average assets) | 82,159 | 7.53 | % | 94,118 | 8.63 | % | 4.00 | % | 4.00 | % | 5.00 | % | ||||||||||||||||
Total risk-weighted assets | 803,026 | 802,610 | ||||||||||||||||||||||||||
Total average assets | 1,090,665 | 1,090,550 |
Consolidated | Bank Only | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations* | ||||||||||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 117,213 | 12.69 | % | $ | 112,128 | 12.17 | % | 8.00 | % | 9.875 | % | 10.00 | % | ||||||||||||||
Tier I capital (to risk-weighted assets) | 105,439 | 11.42 | % | 102,354 | 11.11 | % | 6.00 | % | 7.875 | % | 8.00 | % | ||||||||||||||||
Tier I common equity (to risk-weighted assets) | 96,692 | 10.47 | % | 102,354 | 11.11 | % | 4.50 | % | 6.375 | % | 6.50 | % | ||||||||||||||||
Tier I capital (to average assets) | 105,439 | 8.50 | % | 102,354 | 8.27 | % | 4.00 | % | 4.000 | % | 5.00 | % | ||||||||||||||||
Total risk-weighted assets | 923,441 | 921,126 | ||||||||||||||||||||||||||
Total average assets | 1,239,898 | 1,238,347 |
*Applies to the Bank only. |
Note 11.10. Fair Value Measurements
In determining fair value, FNCB uses various valuation approaches, including market, income and cost approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of FNCB. Unobservable inputs reflect FNCB’s knowledge about the assumptions the market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). A financial asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
● | Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active |
● | Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market |
● | Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value. |
A description of the valuation methodologies used for assets recorded at fair value and for estimating fair value of financial instruments not recorded at fair value, is set forth below.
Cash, Short-term Investments, Accrued Interest Receivable and Accrued Interest Payable
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Available-for-Sale Debt Securities
The estimated fair values of available-for-sale equity securities are determined by obtaining quoted prices on nationally recognized exchanges (Level 1 inputs). The estimated fair values for FNCB’s investments in obligations of U.S. government agencies, obligations of state and political subdivisions, government-sponsored agency CMOs and mortgage-backed securities, corporate debt securities,private collateralized mortgage obligations, asset-backed securities and negotiable certificates of deposit are obtained by FNCB from a nationally-recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing (Level 2 inputs), to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider observable data that may include, among other things, dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, and are based on market data obtained from sources independent from FNCB. The Level 2 investments in FNCB’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. Management has determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in FNCB’s portfolio are not exchange-traded, and such non-exchange-traded fixed income securities are typically priced by correlation to observed market data. FNCB has reviewed the pricing service’s methodology to confirm its understanding that such methodology results in a valuation based on quoted market prices for similar instruments traded in active markets, quoted markets for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which the significant assumptions can be corroborated by market data as appropriate to a Level 2 designation.
For those securities for which the inputs used by an independent pricing service were derived from unobservable market information, FNCB evaluated the appropriateness and quality of each price. Management reviewed the volume and level of activity for all classes of securities and attempted to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value (fair values based on Level 3 inputs). If applicable, the adjustment to fair value was derived based on present value cash flow model projections obtained from third party providers using assumptions similar to those incorporated by market participants.
At September 30, 2017,2019, FNCB owned fourfive corporate debt securities with an aggregate amortized cost and fair value of $5.0$6.0 million and $5.5$6.1 million, respectively. The market for thesefour of the five corporate debt securities at September 30, 20172019 was not active and markets for similar securities are also not active. FNCB obtained valuations for these securities from a third-party service providerproviders that prepared the valuations using a discounted cash flow approach. Management takes measures to validate the service provider’sproviders’ analysis and is actively involved in the valuation process, including reviewing and verifying the assumptions used in the valuation calculations. Results of a discounted cash flow test are significantly affected by variables such as the estimate of the probability of default, estimates of future cash flows, discount rates, prepayment rates and the creditworthiness of the underlying issuers. FNCB considers these inputs to be unobservable Level 3 inputs because they are based on estimates about the assumptions market participants would use in pricing this type of asset and developed based on the best information available in the circumstances rather than on observable inputs. As it relates to fair value measurements, once each issuer is categorized and the forecasted default rates have been applied, the expected cash flows are modeled using the variables described above. Discount rates ranging from 5.54%5.53% to 6.29%6.03% were applied to the expected cash flows to estimate fair value. Management will continue to monitor the market for these securities to assess the market activity and the availability of observable inputs and will continue to apply these controls and procedures to the valuations received from its third-party service provider for the period it continues to use an outside valuation service.
Loans
Except for collateral-dependent impaired loans, fair values of loans are estimated by discounting the projected future cash flows using market discount rates that reflect the credit, liquidity, and interest rate risk inherent in the loan. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. The estimated fair value of collateral-dependent impaired loans is based on the appraised loan value or other reasonable offers less estimated costs to sell. FNCB does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for credit losses is established. The specific reserves for collateral-dependent impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of the collateral is generally based on appraisals. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments are based on unobservable inputs, the resulting fair value measurement is categorized as a Level 3 measurement.
Loans Held For Sale
Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.
Mortgage Servicing RightsEquity Securities
The estimated fair valuevalues of mortgage servicing rights is estimated using a discounted cash flow model that applies current estimated prepayments derived from the mortgage-backed securities market and utilizes a current market discount rate for observable credit spreads. FNCB does not record mortgage servicing rights at fair value on a recurring basis.
Restricted Stock
Ownership in equity securities of the FHLB of Pittsburgh is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.
Equity Investment without a Readily Determinable Fair Value
During the third quarter of 2017, FNCB purchased $1.2 million, representing approximately 4.9%, of the common stock of a privately-held bank holding company. The common stock was purchased as part of a private placement pursuant to an exemption from the registration requirements of the Securities Act of 1933 for offerings not involving any public offering. The common stock is not currently tradedare determined by obtaining quoted prices on any established market, and is not expected to be traded in the near future on any securities exchange or established over-the-counter market. FNCB has elected to account for this transaction as an investment in an equity security without a readily determinable fair value. An equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value. The $1.2 million investment is included in other assets in the consolidated statements of financial condition at September 30, 2017. Management engaged an independent third party to provide a valuation of this investment as of September 30, 2017. The valuation indicated that the investment is not impaired, and accordingly, no adjustment for impairment is required at September 30, 2017.
Deposits
The fair value of demand deposits, savings deposits, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated based on discounted cash flows using FHLB advance rates currently offered for similar remaining maturities.
Borrowed Funds
FNCB uses discounted cash flows using rates currently available for debt with similar terms and remaining maturities to estimate fair value.nationally recognized exchanges (Level 1 inputs).
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of off-balance sheet commitments is insignificant and therefore not included in the table for non-recurring assets and liabilities.
Assets Measured Measured at Fair Value on a Recurring BasisRecurring Basis
The following tables present the financial assets that are measured at fair value on a recurring basis at September 30, 2017 2019and December 31, 2016, 2018, and the fair value hierarchy of the respective valuation techniques utilized by FNCB to determine the fair value:
Fair Value Measurements at September 30, 2017 | Fair Value Measurements at September 30, 2019 | |||||||||||||||||||||||||||||||
Significant | Significant | Significant | Significant | |||||||||||||||||||||||||||||
Quoted Prices | Other | Other | Quoted Prices | Other | Other | |||||||||||||||||||||||||||
in Active Markets | Observable | Unobservable | in Active Markets | Observable | Unobservable | |||||||||||||||||||||||||||
for Identical Assets | Inputs | Inputs | for Identical Assets | Inputs | Inputs | |||||||||||||||||||||||||||
(in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 144,700 | - | 144,700 | - | $ | 101,683 | $ | - | $ | 101,683 | $ | - | ||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 35,272 | - | 35,272 | - | 66,840 | - | 66,840 | - | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 66,459 | - | 66,459 | - | 43,822 | - | 43,822 | - | ||||||||||||||||||||||||
Mortgage-backed securities | 22,522 | - | 22,522 | - | 18,745 | - | 18,745 | - | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 10,063 | - | 10,063 | - | ||||||||||||||||||||||||||||
Corporate debt securities | 5,445 | - | - | 5,445 | 6,101 | - | 1,040 | 5,061 | ||||||||||||||||||||||||
Asset-backed securities | 3,512 | - | 3,512 | - | 5,229 | - | 5,229 | - | ||||||||||||||||||||||||
Negotiable certificates of deposit | 3,192 | - | 3,192 | - | 2,183 | - | 2,183 | - | ||||||||||||||||||||||||
Equity securities | 935 | 935 | - | - | ||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 282,037 | $ | 935 | $ | 275,657 | $ | 5,445 | ||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 254,666 | $ | - | $ | 249,605 | $ | 5,061 | ||||||||||||||||||||||||
Equity securities, at fair value | $ | 922 | $ | 922 | $ | - | $ | - |
Fair Value Measurements at December 31, 2016 | Fair Value Measurements at December 31, 2018 | |||||||||||||||||||||||||||||||
Significant | Significant | Significant | Significant | |||||||||||||||||||||||||||||
Quoted Prices | Other | Other | Quoted Prices | Other | Other | |||||||||||||||||||||||||||
in Active Markets | Observable | Unobservable | in Active Markets | Observable | Unobservable | |||||||||||||||||||||||||||
for Identical Assets | Inputs | Inputs | for Identical Assets | Inputs | Inputs | |||||||||||||||||||||||||||
(in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | 12,188 | $ | - | $ | 12,188 | $ | - | ||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 117,873 | - | 117,873 | - | $ | 152,187 | $ | - | $ | 152,187 | $ | - | ||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 18,084 | - | 18,084 | - | 34,207 | - | 34,207 | - | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 99,350 | - | 99,350 | - | 73,640 | - | 73,640 | - | ||||||||||||||||||||||||
Mortgage-backed securities | 20,576 | - | 20,576 | - | 23,934 | - | 23,934 | - | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 2,913 | - | 2,913 | - | ||||||||||||||||||||||||||||
Corporate debt securities | 3,792 | - | 453 | 3,339 | 4,936 | - | 1,007 | 3,929 | ||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | 1,802 | - | 1,802 | - | ||||||||||||||||||||||||
Negotiable certificates of deposit | 3,216 | - | 3,216 | - | 2,413 | - | 2,413 | - | ||||||||||||||||||||||||
Equity securities | 936 | 936 | - | - | ||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 276,015 | $ | 936 | $ | 271,740 | $ | 3,339 | ||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 296,032 | $ | - | $ | 292,103 | $ | 3,929 | ||||||||||||||||||||||||
Equity securities, at fair value | $ | 891 | $ | 891 | $ | - | $ | - |
There were no transfers between levels within the fair value hierarchy during the nine months ended September 30, 20172019 and 2016.2018.
The following table presents a reconciliation and statement of operations classificationclassifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which consisted entirely of corporate debt securities, for the nine months ended September 30, 2017:2019 and 2018.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Fair Value Measurements | Fair Value Measurements | |||||||||||||||
Using Significant Unobservable Inputs (Level 3) | Using Significant Unobservable Inputs (Level 3) | |||||||||||||||
Corporate Debt Securities | ||||||||||||||||
Corporate Debt Securities | For the Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
Balance at December 31, | $ | 3,339 | $ | 3,269 | ||||||||||||
Balance at January 1, | $ | 3,929 | $ | 4,058 | ||||||||||||
Additions | 2,000 | - | 1,000 | - | ||||||||||||
Payments received | - | - | ||||||||||||||
Payments Received | - | - | ||||||||||||||
Sales | - | - | ||||||||||||||
Total gains or losses (realized/unrealized): | ||||||||||||||||
Included in earnings | - | - | - | - | ||||||||||||
Included in other comprehensive income | 106 | 207 | ||||||||||||||
Included in other comprehensive income (loss) | 132 | (126 | ) | |||||||||||||
Balance at September 30, | $ | 5,445 | $ | 3,476 | $ | 5,061 | $ | 3,932 |
Assets Measured Measured at Fair Value on a Non-Recurring BasisNon-Recurring Basis
The following tables present assetsassets and liabilities measured at fair value on a non-recurring basis at September 30, 2017 2019and December 31, 2016, 2018, and additional quantitative information about the valuation techniques and inputs utilized by FNCB to determine fair value. All such assets were measured using Level 3 inputs.
September 30, 2017 | September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
Fair Value Measurement | Quantitative Information | Fair Value Measurement | Quantitative Information | ||||||||||||||||||||||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | ||||||||||||||||||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | Investment | Allowance | Value | Technique | Inputs | Range | |||||||||||||||||||||||||||||
Impaired loans - collateral dependent | $ | 1,179 | $ | 615 | $ | 564 | Appraisal of collateral | Selling cost | 10.0% | $ | 8,655 | $ | 206 | $ | 8,449 | Appraisal of collateral | Selling cost | 10.0 | % | ||||||||||||||||||||||
Impaired loans - other | 4,554 | 157 | 4,397 | Discounted cash flows | Discount rate | 3.0% | - | 7.5% | 4,374 | 86 | 4,288 | Discounted cash flows | Discount rate | 4.0%-7.5% | |||||||||||||||||||||||||||
Other real estate owned | 1,053 | - | 1,053 | Appraisal of collateral | Selling cost | 10.0% | 256 | - | 256 | Appraisal of collateral | Selling cost | 10.0 | % |
December 31, 2016 | December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Fair Value Measurement | Quantitative Information | Fair Value Measurement | Quantitative Information | ||||||||||||||||||||||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | ||||||||||||||||||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | Investment | Allowance | Value | Technique | Inputs | Range | |||||||||||||||||||||||||||||
Impaired loans - collateral dependent | $ | 482 | $ | 68 | $ | 414 | Appraisal of collateral | Selling cost | 10.0% | $ | 8,020 | $ | 606 | $ | 7,414 | Appraisal of collateral | Selling cost | 10.0 | % | ||||||||||||||||||||||
Impaired loans - other | 3,247 | 234 | 3,013 | Discounted cash flows | Discount rate | 3.0% | - | 7.5% | 4,397 | 51 | 4,346 | Discounted cash flows | Discount rate | 3.7%-7.5% | |||||||||||||||||||||||||||
Other real estate owned | 1,949 | - | 1,949 | Appraisal of collateral | Selling cost | 10.0% | 919 | - | 919 | Appraisal of collateral | Selling cost | 10.0 | % |
The fair value of collateral-dependent impaired loans is determined through independent appraisals or other reasonable offers, which generally include various Level 3 inputs which are not identifiable. Management reduces the appraised value by the estimated costs to sell the property and may make adjustments to the appraised valuevalues as necessary to consider any declines in real estate values since the time of the appraisal. For impaired loans that are not collateral-dependent, fair value is determined using the discounted cash flow method. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance or is charged off. The amount shown is the balance of impaired loans, net of any charge-offs and the related allowance for loan losses.
OREO properties are recorded at fair value less the estimated costs to sell at the date of FNCB’s acquisition of the property. Subsequent to acquisition of the property, the balance may be written down further. It is FNCB’s policy to obtain certified external appraisals of real estate collateral underlying impaired loans and OREO, and estimate fair value using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent and executed sale agreements.
The following table summarizes the estimated fair values of FNCB’s financial instruments using an exit price notion at September 30, 2017 2019and at December 31, 2016. 2018. FNCB discloses fair value information about financial instruments, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. The fair value of financial instruments that are not measured at fair value in the financial statements were based on the exit price notion. The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, management judgment is required to interpret data and develop fair value estimates. Accordingly, the estimates below are not necessarily indicative of the amounts FNCB could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value | September 30, 2017 | December 31, 2016 | Fair Value | September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||||
(in thousands) | Measurement | Carrying Value | Fair Value | Carrying Value | Fair Value | Measurement | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||||
Financial assets | |||||||||||||||||||||||||||||||||||||
Cash and short term investments | Level 1 | $ | 43,810 | $ | 43,810 | $ | 112,445 | $ | 112,445 | Level 1 | $ | 37,511 | $ | 37,511 | $ | 36,481 | $ | 36,481 | |||||||||||||||||||
Securities available for sale | See previous table | 282,037 | 282,037 | 276,015 | 276,015 | ||||||||||||||||||||||||||||||||
FHLB of Pittsburgh stock | Level 2 | 2,450 | 2,450 | 3,311 | 3,311 | ||||||||||||||||||||||||||||||||
Available-for-sale debt securities | See previous table | 254,666 | 254,666 | 296,032 | 296,032 | ||||||||||||||||||||||||||||||||
Equity securities, at fair value | Level 1 | 922 | 922 | 891 | 891 | ||||||||||||||||||||||||||||||||
Restricted stock | Level 2 | 4,194 | 4,194 | 3,123 | 3,123 | ||||||||||||||||||||||||||||||||
Loans held for sale | Level 2 | 147 | 147 | 596 | 596 | Level 2 | 1,140 | 1,140 | 820 | 820 | |||||||||||||||||||||||||||
Loans, net | Level 3 | 750,627 | 744,660 | 722,860 | 712,263 | Level 3 | 827,562 | 818,925 | 829,581 | 816,234 | |||||||||||||||||||||||||||
Accrued interest receivable | Level 2 | 3,203 | 3,203 | 2,757 | 2,757 | Level 2 | 3,038 | 3,038 | 3,614 | 3,614 | |||||||||||||||||||||||||||
Equity securities without readily determinable fair values | Level 3 | 1,160 | 1,160 | - | - | Level 3 | 1,658 | 1,658 | 1,658 | 1,658 | |||||||||||||||||||||||||||
Servicing rights | Level 3 | 254 | 746 | 215 | 744 | Level 3 | 355 | 805 | 350 | 878 | |||||||||||||||||||||||||||
Financial liabilities | |||||||||||||||||||||||||||||||||||||
Deposits | Level 2 | 983,212 | 949,204 | 1,015,139 | 968,904 | Level 2 | 964,060 | 964,119 | 1,095,629 | 1,093,797 | |||||||||||||||||||||||||||
Borrowed funds | Level 2 | 60,660 | 60,678 | 78,847 | 78,923 | Level 2 | 89,768 | 89,897 | 34,240 | 34,108 | |||||||||||||||||||||||||||
Accrued interest payable | Level 2 | 244 | 244 | 242 | 242 | Level 2 | 401 | 401 | 338 | 338 |
Note 12.11. Earnings per Share
For FNCB, thethe numerator of both the basic and diluted earnings per share of common sharestock is net income available to common shareholders (which is equal to net income less dividends on preferred stock and related discount accretion).shareholders. The weighted average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common share equivalents utilizing the treasury stock method. Common share equivalents are outstanding stock options to purchase FNCB’s shares of common sharesstock and unvested restricted stock.
The following table presents the calculation of both basic and diluted earnings per share of common sharestock for the three and nine months ended September 30, 20172019 and 2016:2018:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands, except share data) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
Net income | $ | 2,272 | $ | 2,017 | $ | 6,261 | $ | 4,785 | $ | 2,403 | $ | 1,850 | $ | 7,587 | $ | 6,281 | ||||||||||||||||
Basic weighted-average number of common shares outstanding | 16,757,963 | 16,593,811 | 16,711,172 | 16,554,391 | 20,168,529 | 16,818,625 | 19,678,031 | 16,791,815 | ||||||||||||||||||||||||
Plus: Common share equivalents | 19,708 | - | 17,680 | 1,763 | 3,753 | 19,922 | 5,491 | 22,133 | ||||||||||||||||||||||||
Diluted weighted-average number of common shares outstanding | 16,777,671 | 16,593,811 | 16,728,852 | 16,556,154 | 20,172,282 | 16,838,547 | 19,683,522 | 16,813,948 | ||||||||||||||||||||||||
Income per common share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.14 | $ | 0.12 | $ | 0.37 | $ | 0.29 | $ | 0.12 | $ | 0.11 | $ | 0.39 | $ | 0.37 | ||||||||||||||||
Diluted | $ | 0.14 | $ | 0.12 | $ | 0.37 | $ | 0.29 | $ | 0.12 | $ | 0.11 | $ | 0.39 | $ | 0.37 |
For the three and nine months ended September 30, 20172019 and 2016,2018, common sharestock equivalents reflected in the table above were related entirely to the incremental shares of unvested restricted stock. As of September 30, 2019, there were no outstanding stock options. Stock options of 31,200 and 47,45919,200 outstanding at September 30, 2018 were excluded from common stock equivalents for thethree and nine months ended September 30, 2017 and 2016, respectively, were excluded from common share equivalents.2018. The exercise prices of stock options exceeded the average market price of FNCB’s common shares during the periods presented;at September 30, 2018; therefore, inclusion of these common sharestock equivalents would be anti-dilutive to the diluted earnings per common share calculation. The stock options expired on January 5, 2019.
Note 13. 12. Other Comprehensive Income
The following tables summarizetable summarizes the reclassifications out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 20172019 and 2016, which are 2018, comprised entirely of unrealized gains and losses on available-for-sale debt securities:
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||||||||||||||
Amount Reclassifed | Amount Reclassifed | |||||||||||||||||||
from Accumulated | from Accumulated | |||||||||||||||||||
Other Comprehensive | Affected Line Item in the | Other Comprehensive | Affected Line Item in the | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||||||||||
(in thousands) | Income (Loss) | Consolidated Statements of Income | Income (Loss) | Consolidated Statements of Income | Amount Reclassifed from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Consolidated Statements of Income | Amount Reclassifed from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Consolidated Statements of Income | ||||||||||||
Available-for-sale securities: | ||||||||||||||||||||
Net gains on sale of securities reclassified into net income | $ | (367 | ) | Net gain on sale of securities | $ | (1,338 | ) | Net gain on sale of securities | ||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||
Reclassification adjustment for net (gains) losses reclassified into net income | $ | (379 | ) | Net gain (loss) on the sale of available-for-sale debt securities | $ | (702 | ) | Net gain (loss) on the sale of available-for-sale debt securities | ||||||||||||
Taxes | 125 | Income taxes | 455 | Income taxes | 79 | Income taxes | 147 | Income taxes | ||||||||||||
Net of tax amount | $ | (242 | ) | $ | (883 | ) | $ | (300 | ) | $ | (555 | ) |
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||||||||||||||
Amount Reclassifed | Amount Reclassifed | |||||||||||||||||||
from Accumulated | from Accumulated | |||||||||||||||||||
Other Comprehensive | Affected Line Item in the | Other Comprehensive | Affected Line Item in the | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||
(in thousands) | Income (Loss) | Consolidated Statements of Income | Income (Loss) | Consolidated Statements of Income | Amount Reclassifed from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Consolidated Statements of Income | Amount Reclassifed from Accumulated Other Comprehensive Income (Loss) | Affected Line Item in the Consolidated Statements of Income | ||||||||||||
Available-for-sale securities: | ||||||||||||||||||||
Net gains on sale of securities reclassified into net income | $ | - | Net gain on sale of securities | $ | (960 | ) | Net gain on sale of securities | |||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||
Reclassification adjustment for net (gains) losses reclassified into net income | $ | - | Net gain (loss) on the sale of available-for-sale debt securities | $ | 4 | Net gain (loss) on the sale of available-for-sale debt securities | ||||||||||||||
Taxes | - | Income taxes | 326 | Income taxes | - | Income taxes | (1 | ) | Income taxes | |||||||||||
Net of tax amount | $ | - | $ | (634 | ) | $ | - | $ | 3 |
The following table summarizes the changes in accumulated other comprehensive (loss) income, (loss), net of tax for the three and nine months ended September 30, 20172019 and 2016:2018:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Beginning balance | $ | 1,196 | $ | 7,023 | $ | (1,560 | ) | $ | (61 | ) | ||||||
Other comprehensive income before reclassifications | (844 | ) | (791 | ) | 2,553 | 6,927 | ||||||||||
Amounts reclassified from accumulated other comprehensive income | (242 | ) | - | (883 | ) | (634 | ) | |||||||||
Net other comprehensive income during the period | (1,086 | ) | (791 | ) | 1,670 | 6,293 | ||||||||||
Ending balance | $ | 110 | $ | 6,232 | $ | 110 | $ | 6,232 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Balance, beginning of period | $ | 3,313 | $ | (7,062 | ) | $ | (4,540 | ) | $ | (1,745 | ) | |||||
Other comprehensive income (loss) before reclassifications | 1,552 | (1,819 | ) | 9,660 | (7,204 | ) | ||||||||||
Amount reclassified from accumulated other comprehensive income (loss) | (300 | ) | - | (555 | ) | 3 | ||||||||||
Net other comprehensive income (loss) during the period | 1,252 | (1,819 | ) | 9,105 | (7,201 | ) | ||||||||||
Reclassification of net loss on equity securities upon adoption of ASU 2016-1 | - | - | - | 65 | ||||||||||||
Balance, end of period | $ | 4,565 | $ | (8,881 | ) | $ | 4,565 | $ | (8,881 | ) |
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in the Annual Report on Form 10-K for the year ended December 31, 2016 and Forms 10-Q for the quarters ended March 31, 2017 and June 30, 20172018 for FNCB Bancorp, Inc. and subsidiaries (collectively “FNCB”). In addition, please read this section in conjunction with the consolidated financial statements and notes to consolidated financial statements contained elsewhere herein.
FNCB is Bancorp, Inc. and its subsidiaries ("FNCB") are in the business of providing customary retail and commercial banking services to individuals, businesses and local governments and municipalities through its wholly-owned subsidiary, FNCB Bank, at its 17 full-service branch offices within its primary market area, locatedNortheastern Pennsylvania, and a limited purpose office based in NortheasternAllentown, Lehigh County, Pennsylvania.
FORWARD-LOOKING STATEMENTS
FNCB may from time to time make written or oral “forward-looking statements,” including statements contained in our filings with the Securities and Exchange Commission (“SEC”), in our reports to shareholders, and in our other communications, which are made in good faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to FNCB’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond our control). The words “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan”“plan,” “project,” “future” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause FNCB’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in our markets; the effects of, and changes in trade, monetary, corporate tax and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services; the ability of FNCB to competemanage credit risk; weakness in the economic environment, in general, and within FNCB’s market area; the deterioration of one or a few of the commercial real estate loans with other institutions for business;relatively large balances contained in FNCB’s loan portfolio; greater risk of loan defaults and losses from concentration of loans held by FNCB, including those to insiders and related parties; if FNCB’s ALLL is not sufficient to absorb actual losses or if increases to the composition and concentrationsALLL were required; if management concludes that the decline in value of FNCB’s lending risk and the adequacy of our reserves to manage those risks; the valuationany of FNCB’s investment securities;securities is other-than-temporary; if FNCB’s risk management framework is ineffective in mitigating risks or losses to the abilityCompany; if FNCB’s portfolio of loans to small and mid-sized community-based businesses increases its credit risk; FNCB is subject to interest rate risk; changes in interest rates; if FNCB is unable to successfully compete with others for business; a loss of depositor confidence resulting from changes in either FNCB’s financial condition or in the general banking industry; if FNCB is unable to retain or grow its core deposit base; inability or insufficient dividends from its subsidiary, FNCB Bank; if FNCB loses access to wholesale funding sources; interruptions or security breaches of FNCB’s information systems; any systems failures or interruptions in information technology and telecommunications systems of third parties on which FNCB depends; security breaches; if FNCB’s information technology is unable to keep pace with growth or industry developments or if technological developments result in higher costs or less advantageous pricing; the loss of management and other key personnel; dependence on the use of data and modeling in both its management’s decision-making generally and in meeting regulatory expectations in particular; additional risk arising from new lines of business, products, product enhancements or services offered by FNCB; inaccuracy of appraisals and other valuation techniques FNCB uses in evaluating and monitoring loans secured by real property and other real estate owned; unsoundness of other financial institutions; damage to FNCB’s reputation; defending litigation and other actions; dependence on the accuracy and completeness of information about customers and counterparties; risks arising from future expansion or acquisition activity; environmental risks and associated costs on its foreclosed real estate assets; any remediation ordered, or adverse actions taken, by federal and state regulators, including requiring FNCB to pay dividendsact as a source of financial and managerial strength for the FNCB Bank in times of stress; costs arising from extensive government regulation, supervision and possible regulatory enforcement actions; new or repurchase common shares;changed legislation or regulation and regulatory initiatives; noncompliance and enforcement action with the abilityBank Secrecy Act and other anti-money laundering statutes and regulations; failure to comply with numerous "fair and responsible banking" laws; any violation of FNCB to retain key personnel;laws regarding privacy, information security and protection of personal information or another incident involving personal, confidential or proprietary information of individuals; any rulemaking changes implemented by the impact of any pending or threatened litigation against FNCB; the marketability of shares of FNCB stock and fluctuations in the value of FNCB’s share price; the effectiveness of FNCB’s system of internal controls; the ability of FNCBConsumer Financial Protection Bureau; inability to attract additional capital investment; the impact of changesand retain its highest performing employees due to potential limitations on incentive compensation contained in financial services’ lawsproposed federal agency rulemaking; any future increases in FNCB Bank’s FDIC deposit insurance premiums and regulations (including laws concerning capital adequacy, taxes, banking, securities and insurance); the impact of technological changes and security risks upon our information technology systems; changes in consumer spending and saving habits; the nature, extent, and timing of governmental actions and reforms,assessments; and the success of FNCB at managing the risks involved in the foregoing and other risks and uncertainties, including those detailed in FNCB’s filings with the SEC.
FNCB cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place undue reliance on any forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by FNCB on its website or otherwise. FNCB does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of FNCB to reflect events or circumstances occurring after the date of this report.
Readers should carefully review the risk factors described in the Annual Report and other documents that FNCB periodically files with the SEC, including its Form 10-K for the year ended December 31, 2016.2018.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.
FNCB’sFNCB’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Management has identified the policies on the determination of the allowance for loan and lease losses (“ALLL”), securities’ valuation and impairment evaluation, the valuation of other real estate owned (“OREO”) and income taxes to be critical, as management is required to make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.
The judgments used by management in applying the critical accounting policies discussed below may be affected by changes and/or deterioration in the economic environment, which may impact future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the ALLL in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in FNCB’s investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to impairment losses.
Allowance for Loan and Lease Losses
Management evaluates the credit quality of FNCB’s loan portfolio on an ongoing basis, and performs a formal review of the adequacy of the ALLL on a quarterly basis. The ALLL is established through a provision for loan losses charged to earnings and is maintained at a level management considers adequate to absorb estimated probable losses inherent in the loan portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ALLL, while recoveries of amounts previously charged off are credited to the ALLL.
Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, qualitative factors, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL. Additionally, the ALLL is determined, in part, by the composition and size of the loan portfolio.
The ALLL consists of two components, a specific component and a general component. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted by qualitative factors. The general reserve component of the ALLL is based on pools of unimpaired loans segregated by loan segment and risk rating categories of “Pass”,“Pass,” “Special Mention” or “Substandard and Accruing.” Historical loss factors and various qualitative factors are applied based on the risk profile in each risk rating category to determine the appropriate reserve related to those loans. Substandard loans on nonaccrualnon-accrual status above the $100 thousand loan relationship threshold and all loans considered troubled debt restructurings (“TDRs”) are classified as impaired.
See NoteNote 4, “Loans” of the notes to consolidated financial statements included in Item 1 hereof for additional information about the ALLL.
Securities Valuation and Evaluation for Impairment
Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (Level 1) or quoted prices for similar assets or models using inputs that are observable, either directly or indirectly (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of observable inputs or if markets are illiquid, valuation techniques are used to determine fair value of any investments that require inputs that are both unobservable and significant to the fair value measurement (Level 3). For Level 3 inputs, valuation techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on FNCB’s financial condition or results of operations. See Note 3, “Securities” and Note 11,10, “Fair Value Measurements” of the notes to consolidated financial statements included in Item 1 hereof for additional information about FNCB’s securities valuation techniques.
On a quarterly basis, management evaluates individual investment securities in an unrealized loss position for other than temporary impairment (“OTTI”). The analysis ofevaluation for OTTI requires the use of various assumptions, including but not limited to, the length of time an investment’s fair value is less than book value, the severity of the investment’s decline, any credit deterioration of the issuer, whether management intends to sell the security, and whether it is more likely than notmore-likely-than-not that FNCB will be required to sell the security prior to recovery of its amortized cost basis. Debt investment securities deemed to have OTTI are written down by the impairment related to the estimated credit loss, and the non-credit related impairment loss is recognized in other comprehensive income. FNCB did not recognize any OTTI charges on investment securities for the three and nine months ended September 30, 20172019 and 20162018 within the consolidated statements of income.
Refer to Note 3, “Securities”“Securities,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about valuation of securities.
Other Real Estate Owned
OREO consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a loan, and bank premises that are no longer used for operation or for future expansion. OREO is held for sale and is initially recorded at fair value less costs to sell at the date of acquisition or transfer, which establishes a new cost basis. Upon acquisition of the property through foreclosure or deed-in-lieu of foreclosure, any adjustment to fair value less estimated selling costs is recorded to the ALLL. The determination is made on an individual asset basis. Bank premises no longer used for operations or future expansion are transferred to OREO at fair value less estimated selling costs with any related write-down included in non-interest expense. Subsequent to acquisition, valuations are periodically performed and the assets are carried at the lower of cost or fair value less cost to sell. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed agreements of sale, unless management determines that conditions exist that warrant an adjustment to the value. Costs relating to the development and improvement of the OREO properties may be capitalized; holding period costs and any subsequent changes to the valuation allowance are charged to expense as incurred.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’sentity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in FNCB’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our consolidated financial condition or results of operations.
FNCB records an income tax provision or benefit based on the amount of tax, including alternative minimum tax currently payable or receivable and the change in deferred tax assets and liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Management conducts quarterly assessments of all available positive and negative evidence to determine the amount of deferred tax assets that will more likely than not be realized. FNCB establishes a valuation allowance for deferred tax assets and records a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, management considers past operating results, estimates of future taxable income based on approved business plans, future capital requirements and ongoing tax planning strategies. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period depending on the related circumstances. The recognition of deferred tax assets requires management to make significant assumptions and judgments about future earnings, the periods in which items will impact taxable income, future corporate tax rates, and the application of inherently complex tax laws. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which may result in equity and earnings volatility because such changes are reported in current period earnings.
FNCB uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. On September 27, 2017, the Trump Administration released a tax reform framework that includes a reduction in the U.S. corporate income tax rate to 20.0%. If corporate tax rates are reduced, management expects FNCB would be required to record an initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would record lower tax provisions on an ongoing basis. The House of Representatives is currently working on a draft of the bill, which is expected to be addressed by Congress later in 2017. It is too early to determine if any of the proposals on tax reform are actionable, or if acted upon, the specific tax reforms that would be implemented. Accordingly, management cannot assess the effect that any tax reform measure effectuated would have on FNCB’s operating results or financial position at the present time.
In connection with determining the income tax provision or benefit, management considers maintaining liabilities for uncertain tax positions and tax strategies that it believes contain an element of uncertainty. Periodically, management evaluates each of FNCB’s tax positions and strategies to determine whether a liability for uncertain tax benefits is required. As of September 30, 2017,2019 and December 31, 2016,2018, management determined that FNCB did not have any uncertain tax positions or tax strategies and that no liability was required to be recorded.
Refer to Note 6,5, “Income Taxes”Taxes,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about income taxes.
New Authoritative Accounting Guidance and Accounting Guidance to be Adopted in Future Periods
Refer to Note 2, “New Authoritative Accounting Guidance”Guidance,” of the notes to consolidated financial statements included in Item 1 hereof for information about new authoritative accounting guidance issuedadopted by FNCB during the three months ended September 30, 2017,2019, as well as new accounting guidance issued, but not previously reported, that will be adopted by FNCB in future periods.
Executive Summary
The following overview should be read in conjunction with this MD&A in its entirety.
On June 30, 2016, First National Community Bancorp, Inc., the parent company of First National Community Bank, announced that following receipt of required regulatory approvals from the Pennsylvania Department of Banking and Securities, First National Community Bank had completed a charter conversion from a national bank to a Pennsylvania state bank, and as a result of the conversion, First National Community Bank changed its legal name to FNCB Bank. Both the charter conversion and legal name change became effective June 30, 2016. On October 4, 2016, First National Community Bancorp, Inc., the parent company of FNCB Bank, filed an amendment to its articles of incorporation to change its name, effective October 17, 2016, to FNCB Bancorp, Inc. The Board of Directors of FNCB also amended the bylaws of FNCB, effective October 17, 2016, to reflect the new name.
FNCB recorded consolidated net income of $2.3$2.4 million, or $0.14$0.12 per basic and diluted common share, for the three-month periodthree months ended September 30, 2017,2019, an increase of $0.3 million$553 thousand, or 29.9%, compared to net income of $2.0$1.9 million, or $0.12$0.11 per basic and diluted common share, for the comparable three months of 2016.ended September 30, 2018. Net income for the nine months ended September 30, 2017 was2019 totaled$7.6 million, or$0.39 per basic and diluted share, an increase of $1.3 million, or 20.8%, from $6.3 million, or $0.37 per basic and diluted common share, an increase of $1.5 million, compared to net income of $4.8 million, or $0.29 per diluted common share, for the same periodnine months of 2016.2018. The earnings improvement for both the three months and nine months ended September 30, 2019 was largely due to a reduction in the provision for loan and lease losses, coupled with an increase in non-interest income. Partially offsetting these positive factors was a decrease in net interest income and an increase in non-interest expense.
For the three months and nine months ended September 30, 2019, the annualized return on average assets was0.80%and 0.84%, respectively, and 0.59% and 0.69%, respectively, for the same periods of 2018. The annualized return on average equity was 9.27% 7.30%and 8.87%8.32%, respectively, for the three- and nine-month periods ended September 30, 2017,2019, compared to 8.46%8.41% and 6.95%9.68%, respectively, for the comparable periods in 2016. For the threeof 2018. FNCB declared and nine months ended September 30, 2017, the annualized return on average assets was 0.80% and 0.74%, respectively, and 0.73% and 0.58%, respectively, for the same periods of 2016. FNCB paid dividends to holders of common stock of $0.03$0.05 per share for the three months ended September 30, 2017, totaling $0.09third quarter and $0.15 per share for the year-to-date period of 2017. Dividends paid to holders of common stock were $0.02 per share and $0.06 per share for the three and nine months ended September 30, 2016, respectively. On October 25, 2017, the board of directors of FNCB declared a dividend of $0.04 per share for the fourth quarter of 2017, an increase of 33.3% compared the third quarter of 2017 and the fourth quarter of 2016. The fourth quarter dividend is payable on December 15, 2017 to shareholders of record as of December 1, 2017.
The $0.3 million, or 12.6%, increase in earnings for the third quarter of 2017, as compared to the same quarter of 2016, was primarily due to increases in net interest income and non-interest income of $0.6 million and $0.3 million, respectively, coupled with a decrease of $0.2 million in non-interest expense. Partially offsetting these positive fluctuations was a provision for loan and lease losses of $0.5 million as compared to a credit for loan and lease losses of $0.2 million in 2016, and an increase of $0.1 million in income tax expense.
Year-to-date net income increased $1.5 million, or 30.8%, comparing the nine months ended September 30, 20172019, a 25.0% increase compared to $0.04 per share and 2016.$0.12 per share for the same periods of 2018. The improvement in earningsdividend pay-out ratio for the nine months ended September 30, 2019, was due primarily39.8%, compared to an increase in net interest income30.3% for the comparable period of $1.42018.
Total assets decreased $40.5 million, or 6.2%, coupled with a decrease in the provision for loan and lease losses of $0.4 million, an increase in non-interest income of $0.5 million and a decrease in non-interest expense of $0.1 million. These improvements were partially offset by an increase in income tax expense of $0.9 million.
Total assets decreased $38.5 million, or 3.2%3.3%, to $1.157$1.197 billion at September 30, 20172019 from $1.196$1.238 billion at December 31, 2016.2018. The change in total assets primarily resulted fromreflected a $68.6$2.2 million, or 61.0%0.3%, reductiondecrease in cashloans, net of deferred costs and cash equivalents, which was driven by a $31.9unearned income to $836.9 million reduction in total deposits,at September 30, 2019 from $839.1 million at December 31, 2018. The planned runoff of indirect automobile loans, coupled with the repaymentanticipated payoff of borrowed funds of $18.2 million. Thetwomunicipal loans were the primary factors leading to the declines in loans. Also contributing to the balance sheet contraction was a $41.4 million, or 14.0%, decrease in totalavailable-for-sale debt securities to $254.6 million at September 30, 2019 from $296.0 million at December 31, 2018. Total deposits decreased by $131.6 million, or 12.0%, to $964.1 million at September 30, 2019 from $1.096 billion at December 31, 2018. The decline in deposits was primarily attributable to the anticipated exitcyclical net outflows of short-term public funds in the first quarter of 2017 related to the sale of a municipal utility in December 2016. The remainder of the reduction in cash and cash equivalents resulted from reinvestment into interest-earning assets, as net loans . Borrowed fundsincreased by $27.8$55.5 million, or 3.8%, and available-for-sale securities increased $6.0 million, or 2.2%.
Total shareholders’ equity increased $7.1 million, or 7.9%162.2%, to $97.5$89.8 million at September 30, 20172019 from $90.4$34.2 million at December 31, 2016. The2018.
Total shareholders’ equity increased $35.4 million, or 36.4%, to $132.6million at September 30, 2019 from $97.2 million at December 31, 2018. FNCB successfully completed a public offering of its common stock in February 2019, which resulted in a net increase to capital improvement resulted primarily fromafter offering expenses of $21.3 million. Also contributing to the increase in capital was net income for the first nine months ended September 30, 2019of 2017 of $6.3$7.6 million coupled withand a $1.7 $9.1million increase in accumulated other comprehensive income which resulted fromrelated to appreciation in the fair value of FNCB’s available-for-sale securities, net of income taxes. Partially offsetting these increases were dividends declared and paid of$3.0million for the tax impact of the appreciation.nine months ended September 30, 2019.
With a focus on diversity, furthering FNCB’s strategic goals and strengthening corporate governance, on September 27, 2017,During the board of directors of FNCB and the Bank elected three new independent members to the boards of both entities and approved the formation of a community advisory board. The addition of the new members extends both boards to 12 directors. The advisory board will consist of members from Northeastern Pennsylvania and the Lehigh Valley who will advise, support and serve as liaisons for the Bank in developing and furthering relationships with businesses and the community in our market area. The board of directors expects to fill advisory board positions in 2018. In addition to expanding the board and approving the formation of an advisory board, on September 27, 2017, the Board of Directors approved revisions to its Corporate Governance Guidelines to set a retirement age for FNCB’s and the Bank’s directors and executive officers. According to the approved revisions, no person can be nominated to serve as a Director after he or she has passed his or her 80thbirthday. In the event that a director turns the age of 80 during his or her term as a Director, he or she may serve the remaining time of his or her term until his or her successor is duly elected and qualified or until the earlier of his or her death, resignation or removal. In addition, FNCB’s and the Bank’s executive officers are now subject to a mandatory retirement age of 75. Such retirement age may be waived for the President and Chief Executive Officer for strategic planning purposes in the sole discretion of the Board of Directors of FNCB and the Bank.
Throughout the lastsecond quarter of 2017, and in preparation for 2018, management continues to be focused on developing strategies aimed at improving long-term financial performance by improving efficiency, increasing net interest income through commercial and retail loan growth initiatives, and developing additional sources of non-interest income. On January 20, 2017,2019, FNCB opened a loan production officede novo branch in Allentown, Lehigh County, Pennsylvania, and began offering its retail and commercial lending products in this new market area. Additionally, in order to facilitate loan growth initiatives, on March 7, 2017, FNCB opened a lending center immediately adjacent to its main office in Dunmore, Lackawanna County, Pennsylvania, which houses part of its commercial and retail lending units.
As part of its responsibilities, management regularly evaluates FNCB’s delivery system and facilities including analyzing each office’s operating efficiency, location, foot traffic, structure and design. As a result of these evaluations, on May 1, 2017, FNCB announced that the Bank will implement a comprehensive branch network improvement program that will focus on strengthening, better positioning and expanding its market coverage by developing new state-of-the-art customer facilities, as well as relocating and consolidating select locations. In accordance with the branch network improvement program, on June 30, 2017, FNCB consolidated its branch office located at 1127 Texas Palmyra Highway, Honesdale, Wayne County, Pennsylvania with its branch located at 1001 Main Street, Honesdale, Pennsylvania.
As part of this network improvement program, FNCB announced its intention to relocate three branches located inMountain Top, Luzerne County, Pennsylvania toin a new location. The three branches that will be relocated are: 1) a branch located at 734 San Souci Parkway, Hanover Township, Pennsylvania; 2) a branch located at 27 North River Street, Plains, Pennsylvania; and 3) a branch located at 3 Old Boston Road, Pittston, Pennsylvania. These three branches will be relocated into a brand-new facility to be built in the Richland 315 development located at 1150 Route 315, Wilkes-Barre (Plains Township), Luzerne County, Pennsylvania. FNCB currently leases the three branches, as well as the aforementioned Honesdale branch, that was consolidated, and will lease the future Luzerne County facility. FNCB does not expect to incur any significant disposal costs on either the Wayne County or Luzerne County branch consolidations. The construction of this project is expected to beginpurchased in the fourth quarter of 2017 and be completed2018. Also, in the second quarter of 2018,2019, FNCB completed the construction and relocation of its main office into a new state-of-the-art facility. The new main office is located directly across the street from the former main office at which time the consolidation will occur. The three existing branches will continue to operate as full-service branches until that time.
Following continued analysis of FNCB’s locations and facilities, on September 27, 2017, the Board of Directors approved the purchase of the Bank’s corporate center located at 200 South100 S. Blakely Street, Dunmore, Pennsylvania, for $2.15 million. FNCB has been leasing this property since 1994.Lackawanna County, Pennsylvania. Both the Mountain Top community office and the new Main Office feature the personal banker model and a relaxed, cafe-like atmosphere designed to enhance the customer's in-branch banking experience. The purchase, which is scheduled to be finalized in January 2018, will becost of the main office relocation project approximated $2.0 million and was funded by cash generated by operationsfrom operations. The former main office is currently being renovated and is anticipated to reduce occupancy expenses in excesswill house members of $100,000 annually.FNCB's Commercial Lending and Retail Banking Units.
Following the close of the U.S. Stock Market on June 28, 2019, FNCB was added as a member of the Russell 3000® Index, when FTSE Russell reconstituted its comprehensive set of U.S. and global equity indexes. The programannual Russell indexes reconstitution captures the 4,000 largest U.S. stocks and ranks them by total market capitalization. Russell indexes are widely used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies. As such, management believes that inclusion in Russell 3000® Index will continue to increase the visibility and liquidity of FNCB's common stock, as well as provide exposure to leading institutional investors.
Throughout 2019, management has been focused on strategic business market opportunities that would enhance shareholder value through balance sheet repositioning, net interest margin improvement and diversification and growth of non-interest revenue streams, while creating operating efficiencies and enhancing profitability. In order to assist in these initiatives, in 2019, FNCB appointed a Chief Banking Officer and a Chief Business Development Officer to its Executive Management Team. The Chief Banking Officer, who has extensive retail financial sales and managerial experience oversees FNCB's commercial lending, retail lending and retail banking units. The Chief Business Development Office brings years of banking industry experience and will work to identify and develop business opportunities in new and existing markets.
During the third quarter of 2019, management also calls for the continuedengaged an independent third party consultant under a revenue share agreement to conduct an evaluation of FNCB’s delivery systems. InFNCB’s non-interest revenue streams and fee structure to identify opportunities for enhancement. The initial assessment has been completed and recommendations have been provided and approved by management. Implementation of the secondapproved recommendations will be finalized in the fourth quarter of 2017,2019. Additionally, in the fourth quarter of 2019 FNCB commenced a project to upgradewill extend its entire automated teller machine network. In addition, management plans("ATM") and mobile-banking platforms. On October 4, 2019, FNCB joined AllPoint®, a third-party ATM network that will provide customers with approximately 55,000 surcharge free ATMs throughout the United States, Canada, Mexico and the United Kingdom. With regard to evaluatemobile-banking, FNCB will begin offering several electronic payment alternatives including Apple Pay, Samsung Pay and Google Pay to its customers in the developmentfourth quarter of new state-of-the-art facilities on properties already owned by FNCB located2019, and electronic money transfer through Zelle® in Taylor Borough, Lackawanna County, Pennsylvania and in Dunmore, Lackawanna County, Pennsylvania.first half of 2020.
Summary of Performance
Net Interest Income
NetThe $236 thousand, or 2.5%, decrease in tax-equivalent net interest income iscomparing the difference between (i) interest incomethird quarters of 2019 and 2018, was due to a $219 thousand, or 1.9%, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits and borrowed funds. Netreduction in tax-equivalent interest income, represents the largest component of FNCB’s operating income and, as such, is the primary determinant of profitability. Netcoupled with a $17 thousand increase in interest expense. The reduction in tax-equivalent interest income is impactedcomparing the three months ended September 30, 2019 and 2018 was caused primarily by variationsa decrease in the volume, rate and composition ofaverage earning assets, and interest-bearing liabilities, changes in general market rates and the level of non-performing assets. Interest income is shown on a fully tax-equivalent basis and is calculatedpartially offset by adjusting tax-free interest using a marginal tax rate of 34.0% in order to equate the yield to that of taxable interest rates.
Since the first 25-basis pointan increase in the federal funds target ratetax-equivalent yield on December 16, 2015, the Federal Open Market Committee (“FOMC”) increased the target rate a total of 75 basis points in three 25-basis point actions on December 14, 2016, March 15, 2017 and June 14, 2017. These actions resulted in corresponding increases in the national prime rate. At September 30, 2017, the national prime rate was 4.25%, 75 basis points higher than 3.50% at September 30, 2016. FNCB experienced an increase in loan yields in the third quarter and year-to-date period of 2017 as compared to the same periods of 2016, as variable- and adjustable-rate loans have begun to reprice upward. The increase in market interest rates has also led to notable increases in funding costs, specifically FHLB borrowings. Deposit costs have also begun to increase, but to a lesser extent.
Net interest income on a tax-equivalent basis increased $0.6 million, or 7.9%, to $8.5 millionearning assets. Earning assets averaged $1.1 billion for the three months ended September 30, 2017 from $7.9 million for the comparable period2019, a decrease of 2016. Tax-equivalent interest income increased $0.8$69.7 million, or 9.2%6.0%, compared to $9.7 million for the three months ended September 30, 2017 from $8.9 million$1.2 billion for the same periodthree months of 2016. Partially offsetting the increase2018, which resulted in a corresponding decrease in tax-equivalent interest income was an increase in interest expense of $0.2 million, or 18.0%, which largely reflected an increase in interest expense paid on deposits, partially offset by a reduction in interest on borrowed funds. Tax-equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-earning assets. FNCB’s tax-equivalent net interest margin improved 13 basis points to 3.27% for the third quarter of 2017 from 3.14% for the same quarter of 2016. Additionally, the tax-equivalent margin for the third quarter of 2017 was a 6-basis point improvement compared to 3.21% for the second quarter of 2017. Rate spread, the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities shown on a fully tax-equivalent basis, was 3.18% for the three months ended September 30, 2017, an increase of 12 basis points compared to 3.06% for the same period of 2016. FNCB’s tax-equivalent net interest margin and spread for the nine months ended September 30, 2017 each improved by 5 basis points as compared to the same period of 2016.
The $0.8 million increase in tax-equivalent interest income$683 thousand. Specifically, comparing the third quarters of 20172019 and 20162018, average loans and investment securities decreased $39.6 million, or 4.6%, and $36.4 million, or 11.8%, respectively, which caused corresponding decreases in tax-equivalent interest income of $438 thousand and $265 thousand respectively. Partially offsetting the decreases due to changes in volumes of earning assets, was due primarily to an improvement18-basis point increase in the tax-equivalent yield on earning assets to 4.22% for the third quarter of 2019 from 4.04% for the same quarter of 2018, which resulted in an increase to tax-equivalent interest income of $464 thousand. Comparing the three months ended September 30, the tax-equivalent yield on the loan portfolio increased 19 basis points which contributed $580 thousand to the increase4.67% in tax-equivalent interest income. Specifically, the tax-equivalent yields on loans, investment securities, and interest-bearing deposits with banks increased by 22 basis points, 21 basis points, and 78 basis points, respectively, contributing $414 thousand, $151 thousand, and $15 thousand, respectively, to the improvement2019 from 4.48% in tax-equivalent interest income. Additionally, the average balance of earning assets increased by $36.8 million, which resulted2018, resulting in a corresponding increase in tax-equivalent interest income of $240$393 thousand. The increase was concentrated inAdditionally, the average balance of investment securities, which grew $29.6 million, or 11.3%, to $290.9 million for the three months ended September 30, 2017 from $261.3 million for the same three months of 2016, astax-equivalent yield on the investment portfolio played a more prominent roleincreased 11 basis points to 2.95% in FNCB’s mix of earning assets. In addition, average loans grew $6.2 million, or 0.8%, comparing the third quarters of 2017 and 2016, contributing $45 thousand2019 compared to the increase2.84% in tax-equivalent interest income.
Partially offsetting the improvement2018, resulting in additional tax-equivalent interest income was a $195of $78 thousand.
The $17 thousand increase in interest expense comparing the third quarters of 20172019 and 2016, which largely reflected2018 was caused by higher funding costs, partially offset by a 7-basis point increasereduction in theaverage interest-bearing liabilities. FNCB’s cost of funds increased 11 basis points to 0.59%1.11% for the three months ended September 30, 20172019 from 0.52%1.00% for the comparable periodsame three months of 2016. Partially offsetting the higher funding costs was a reduction in the average balance of borrowed funds. Interest expense paid on deposits for the third quarter of 2017 increased $239 thousand over the comparable quarter of 2016, which was driven by a 10-basis point increase in the average rate paid on deposits,2018, resulting in an increase into interest expense of $223$518 thousand. When comparing the third quarter of 2017 with that of 2016, the increaseSpecifically, increases in rates paid on interest-bearing demand deposits savings deposits, and time deposits increased by 16 basis points, 3 basis points, and 4 basis points, respectively. Thedeposit specials resulted in an increase in rates was coupled with increases in the average balancecost of interest-bearing deposits of $55.2 million, or 7.5%,21 basis points to 0.96% in 2019 from 0.75% in 2018, which also contributedresulted in an increase to the increase in interest expense by $16of $439 thousand. Partly offsettingAdditionally, the cost of borrowed funds increased 23 basis points to 2.58% in 2019 from $2.35% in 2018, resulting in an increase into interest expense paid on interest-bearing depositsof $79 thousand. Partially offsetting these increases was a decrease of $44 thousand in interest paid on borrowed funds, driven entirely by a reduction in the average balancebalances of $30.6 million, or 29.5%, to $73.2 million forinterest-bearing liabilities. For the three months ended September 30, 20172019, interest-bearing liabilities averaged $880.9 million, a decrease of $96.4 million, or 9.9%, from $103.8$977.3 million for the same three months of 2016.2018, which resulted in a decrease to interest expense of $501 thousand. Specifically, average borrowed funds decreased $63.8 million, or 42.6%, to $85.9 million in 2019 from $149.7 million in 2018, as FNCB reduced its reliance on wholesale funding. The reduction in borrowed funds accounted for $404 thousand, or 80.6%, of the decrease in interest expense due to changes in volumes of interest-bearing liabilities. Additionally, reductions in brokered deposits and runoff of retail time deposit specials resulted in a $32.6 million, or 3.9%, decrease in average deposits to $795.0 million in 2019 from $827.6 million in 2018. The decrease in average borrowed funds leddeposit volumes resulted in a corresponding decrease to a decrease in interest expense of $128$97 thousand which was partly offset by a 37-basis point increase incomparing the average rate paid on borrowed funds, resulting in an increase in interest expense of $84 thousand.three months ended September 30, 2019 and 2018.
For the nine months ended September 30, 2017,2019, tax-equivalent net interest income ondecreased $434 thousand, or 1.6%, to $27.3 million from $27.7 million for the same period of 2018, as a tax-equivalent basis increased $1.4$1.6 million, or 5.9%27.2%, increase in interest expense overshadowed an $1.2 million, or 3.5%, increase in tax-equivalent interest income. The increase in interest expense comparing the year-to-date periods of 2019 and 2018 was caused by higher funding costs, partially offset by a reduction in average interest-bearing liabilities. FNCB’s cost of funds increased 27 basis points to 1.11% for the nine months ended September 30, 2019 from 0.84% for the same nine months of 2018, resulting in an increase to interest expense of $2.7 million. Specifically, increases in average rates paid on interest-bearing demand deposits and time deposit specials resulted in an increase in the cost of interest-bearing deposits of 37 basis points to 0.99% in 2019 from 0.62% in 2018, which resulted in an increase to interest expense of $2.2 million. Additionally, the cost of borrowed funds increased 58 basis points to 2.73% in 2019 from 2.15% in 2018, resulting in an increase to interest expense of $0.5 million. Partially offsetting these increases was a reduction in the average balances of interest-bearing liabilities. For the nine months ended September 30, 2019, interest-bearing liabilities averaged $915.3 million, a decrease of $31.6 million, or 3.3%, from $947.0 million for the same period of 2018, which resulted in a decrease to interest expense of $1.0 million. Management was focused on reducing FNCB’s reliance on wholesale funding during the nine months ended September 30, 2019. As a result, average borrowed funds decreased $73.2 million, or 52.7%, to $24.8$65.6 million in 2019 from $23.4$138.8 million in 2018, which caused a corresponding decrease to interest expense of $1.4 million. Conversely, increases in average interest-bearing deposits and average time deposits, partially offset by a reduction in average savings accounts resulted in a $41.5 million, or 5.1%, increase in average deposits to $849.7 million in 2019 from $808.2 million in 2018. The increase in average deposit volumes resulted in a corresponding increase to interest expense of $0.4 million comparing the year-to-date periods of 2019 and 2018.
Partially offsetting the increase in interest expense was a $1.2 million, or 3.5%, increase in tax-equivalent interest income to $34.9 million for the nine months ended September 30, 2019 from $33.7 million for the comparable period in 2016. Comparing the year-to-date periods of 2017 and 2016, tax-equivalent interest income increased $1.7 million, or 6.4%, while interest expense increased $0.3 million, or 10.8%.2018. The increase in tax-equivalent interest incomewas caused primarily reflectedby an increase in the tax-equivalent yield on earning assets, coupled withpartially offset by a strong growthreduction in average earningearnings assets. The tax-equivalent yield on earning assets impacted by FOMC actions, improved 8increased 20 basis points to 3.63%4.14% for the nine months ended September 30, 20172019 from 3.55%3.94% for the same period of 2016. The increase resulted from increases in the yields on loans, investment securities, and interest-bearing deposits of 13 basis points, 16 basis points, and 53 basis points, respectively, contributing $789 thousand, $331 thousand, and $32 thousand, respectively, to the improvement in tax-equivalent interest income. The average balance of interest-earning assets increased $41.1 million, or 4.1%, comparing the year-to-date period of 2017 with that of 2016,2018, which resulted in a $555 thousandan increase into tax-equivalent interest income. The average balancesincome of investment securities grew $26.8 million, or 10.2%, to $289.1 million for$1.6 million. Comparing the nine months ended September 30, 2017the tax-equivalent yield on the loan portfolio increased 25 basis points to 4.61% in 2019 from $262.3 million for the same period of 2016, which resulted4.36% in additional2018, resulting in a corresponding increase in tax-equivalent interest income of $535 thousand. In addition$1.5 million. Additionally, the average balance of interest-bearing depositstax-equivalent yield on the investment portfolio increased 4 basis points to 2.87% in other banks increased $15.6 million and resulted2019 compared to 2.83% in an increase2018, resulting in additional tax-equivalent interest income of $100 thousand$90 thousand. Average earning assets decreased of $15.8 million, or 1.4%, comparing the nine-monthyear-to-date periods ended September 30, 2017of 2019 and 2016. Slightly offsetting these volume increases was an $80 thousand decrease in interest income due to a $1.3 million, or 0.2%, reduction in the average balance of loans to $728.4 million for the nine months ended September 30, 2017 from $729.7 million for the same nine-month period of 2016.
The increase in interest expense of $0.3 million also reflected the FOMC actions as both deposit and borrowing costs have risen in response. The cost of deposits increased 5 basis points from 0.37% for the nine months ended September 30, 2016, to 0.42% for the same period of 2017. In addition, the cost of borrowed funds increased 38 basis points from 1.35% for the year-to-date period of 2016 to 1.73% for the comparable period of 2017. The increases in rates paid on deposits and borrowed funds led to increases in interest expense of $443 thousand and $265 thousand, respectively. These rate increases were partially offset by a decline in the average balance of borrowed funds of $36.9 million, or 33.1%, to $74.6 million for the nine months ended September 30, 2017 from $111.5 million for the nine months ended September 30, 2016,2018, which resulted in a reductioncorresponding decrease in tax-equivalent interest expense paidincome of $431 thousand. The aforementioned factors resulted in a moderate increase in the cost of interest-bearing liabilities of 3 basis points to 0.53% from 0.50% when$0.4 million. Specifically, comparing the nine months ended September 30, 20172019 and 2016,2018, average investment securities decreased $22.4 million, or 7.3%, while average loans decreased $1.3 million, or 0.2%, which caused corresponding decreases in tax-equivalent interest income of $471 thousand and $35 thousand, respectively. Partially offsetting the decreases in average investments and average loans was a $7.9 million, or 233.0%, increase in average interest-bearing deposits in other banks to $11.3 million in 2019 from $3.4 million in 2018, which contributed $133 thousand in tax-equivalent interest income.
Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following tables present certain information about FNCB’s consolidated statements of financial condition and consolidated statements of income for the three-three and nine-month periods ended September 30, 20172019 and 2016,2018, and reflectreflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2019 | September 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Balance | Interest | Cost | Balance | Interest | Cost | Balance | Interest | Cost | Balance | Interest | Cost | ||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Earning assets (2)(3) | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans-taxable (4) | $ | 700,729 | $ | 7,266 | 4.15 | % | $ | 685,038 | $ | 6,751 | 3.94 | % | $ | 781,963 | $ | 9,170 | 4.69 | % | $ | 803,314 | $ | 9,059 | 4.51 | % | ||||||||||||||||||||||||
Loans-tax free (4) | 38,109 | 470 | 4.93 | % | 47,620 | 526 | 4.42 | % | 37,638 | 403 | 4.28 | % | 55,848 | 559 | 4.01 | % | ||||||||||||||||||||||||||||||||
Total loans (1)(2) | 738,838 | 7,736 | 4.19 | % | 732,658 | 7,277 | 3.97 | % | 819,601 | 9,573 | 4.67 | % | 859,162 | 9,618 | 4.48 | % | ||||||||||||||||||||||||||||||||
Securities-taxable | 290,348 | 1,998 | 2.75 | % | 260,431 | 1,650 | 2.53 | % | 266,653 | 1,951 | 2.93 | % | 303,037 | 2,138 | 2.82 | % | ||||||||||||||||||||||||||||||||
Securities-tax free | 600 | 11 | 7.33 | % | 905 | 14 | 6.19 | % | 4,611 | 47 | 4.08 | % | 4,664 | 47 | 4.03 | % | ||||||||||||||||||||||||||||||||
Total securities (1)(5) | 290,948 | 2,009 | 2.76 | % | 261,336 | 1,664 | 2.55 | % | 271,264 | 1,998 | 2.95 | % | 307,701 | 2,185 | 2.84 | % | ||||||||||||||||||||||||||||||||
Interest-bearing deposits in other banks | 7,499 | 24 | 1.28 | % | 6,448 | 8 | 0.50 | % | 10,007 | 30 | 1.20 | % | 3,735 | 17 | 1.82 | % | ||||||||||||||||||||||||||||||||
Total earning assets | 1,037,285 | 9,769 | 3.77 | % | 1,000,442 | 8,949 | 3.58 | % | 1,100,872 | 11,601 | 4.22 | % | 1,170,598 | 11,820 | 4.04 | % | ||||||||||||||||||||||||||||||||
Non-earning assets | 101,181 | 107,762 | 99,888 | 85,091 | ||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan and lease losses | (8,578 | ) | (8,752 | ) | (9,081 | ) | (9,573 | ) | ||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 1,129,888 | $ | 1,099,452 | $ | 1,191,679 | $ | 1,246,116 | ||||||||||||||||||||||||||||||||||||||||
Liabilities and shareholders' equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 489,950 | 483 | 0.39 | % | $ | 424,088 | 244 | 0.23 | % | $ | 480,277 | 1,011 | 0.84 | % | $ | 481,120 | 722 | 0.60 | % | ||||||||||||||||||||||||||||
Savings deposits | 102,281 | 35 | 0.14 | % | 99,273 | 27 | 0.11 | % | 93,369 | 31 | 0.13 | % | 97,634 | 33 | 0.14 | % | ||||||||||||||||||||||||||||||||
Time deposits | 200,418 | 425 | 0.85 | % | 214,070 | 433 | 0.81 | % | 221,325 | 859 | 1.55 | % | 248,816 | 804 | 1.29 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 792,649 | 943 | 0.48 | % | 737,431 | 704 | 0.38 | % | 794,971 | 1,901 | 0.96 | % | 827,570 | 1,559 | 0.75 | % | ||||||||||||||||||||||||||||||||
Borrowed funds and other interest-bearing liabilities | 73,168 | 337 | 1.84 | % | 103,821 | 381 | 1.47 | % | 85,927 | 554 | 2.58 | % | 149,682 | 879 | 2.35 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 865,817 | 1,280 | 0.59 | % | 841,252 | 1,085 | 0.52 | % | 880,898 | 2,455 | 1.11 | % | 977,252 | 2,438 | 1.00 | % | ||||||||||||||||||||||||||||||||
Demand deposits | 156,483 | 152,319 | 169,416 | 173,616 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 10,325 | 11,006 | 10,730 | 7,983 | ||||||||||||||||||||||||||||||||||||||||||||
Shareholders' equity | 97,263 | 94,875 | 130,635 | 87,265 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and shareholder's equity | $ | 1,129,888 | $ | 1,099,452 | $ | 1,191,679 | $ | 1,246,116 | ||||||||||||||||||||||||||||||||||||||||
Net interest income/interest rate spread (6) | 8,489 | 3.18 | % | 7,864 | 3.06 | % | 9,146 | 3.11 | % | 9,382 | 3.04 | % | ||||||||||||||||||||||||||||||||||||
Tax-equivalent adjustment | (164 | ) | (184 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Tax equivalent adjustment | (95 | ) | (127 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income as reported | $ | 8,325 | $ | 7,680 | $ | 9,051 | $ | 9,255 | ||||||||||||||||||||||||||||||||||||||||
Net interest margin (7) | 3.27 | % | 3.14 | % | 3.32 | % | 3.21 | % |
Nine Months Ended | ||||||||||||||||||||||||
September 30, 2019 | September 30, 2018 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
(dollars in thousands) | Balance | Interest | Cost | Balance | Interest | Cost | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Earning assets (2)(3) | ||||||||||||||||||||||||
Loans-taxable (4) | $ | 781,612 | $ | 27,194 | 4.64 | % | $ | 778,906 | $ | 25,624 | 4.39 | % | ||||||||||||
Loans-tax free (4) | 46,019 | 1,417 | 4.11 | % | 50,071 | 1,514 | 4.03 | % | ||||||||||||||||
Total loans (1)(2) | 827,631 | 28,611 | 4.61 | % | 828,977 | 27,138 | 4.36 | % | ||||||||||||||||
Securities-taxable | 280,114 | 5,997 | 2.85 | % | 303,239 | 6,400 | 2.81 | % | ||||||||||||||||
Securities-tax free | 4,624 | 142 | 4.09 | % | 3,897 | 120 | 4.11 | % | ||||||||||||||||
Total securities (1)(5) | 284,738 | 6,139 | 2.87 | % | 307,136 | 6,520 | 2.83 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 11,309 | 155 | 1.83 | % | 3,396 | 52 | 2.04 | % | ||||||||||||||||
Total earning assets | 1,123,678 | 34,905 | 4.14 | % | 1,139,509 | 33,710 | 3.94 | % | ||||||||||||||||
Non-earning assets | 95,412 | 84,737 | ||||||||||||||||||||||
Allowance for loan and lease losses | (9,344 | ) | (9,465 | ) | ||||||||||||||||||||
Total assets | $ | 1,209,746 | $ | 1,214,781 | ||||||||||||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 503,483 | 3,095 | 0.82 | % | $ | 486,904 | 1,855 | 0.51 | % | ||||||||||||||
Savings deposits | 92,893 | 96 | 0.14 | % | 101,066 | 101 | 0.13 | % | ||||||||||||||||
Time deposits | 253,306 | 3,092 | 1.63 | % | 220,206 | 1,804 | 1.09 | % | ||||||||||||||||
Total interest-bearing deposits | 849,682 | 6,283 | 0.99 | % | 808,176 | 3,760 | 0.62 | % | ||||||||||||||||
Borrowed funds and other interest-bearing liabilities | 65,648 | 1,343 | 2.73 | % | 138,808 | 2,237 | 2.15 | % | ||||||||||||||||
Total interest-bearing liabilities | 915,330 | 7,626 | 1.11 | % | 946,984 | 5,997 | 0.84 | % | ||||||||||||||||
Demand deposits | 161,036 | 172,050 | ||||||||||||||||||||||
Other liabilities | 11,406 | 9,019 | ||||||||||||||||||||||
Shareholders' equity | 121,974 | 86,728 | ||||||||||||||||||||||
Total liabilities and shareholder's equity | $ | 1,209,746 | $ | 1,214,781 | ||||||||||||||||||||
Net interest income/interest rate spread (6) | 27,279 | 3.03 | % | 27,713 | 3.10 | % | ||||||||||||||||||
Tax equivalent adjustment | (328 | ) | (343 | ) | ||||||||||||||||||||
Net interest income as reported | $ | 26,951 | $ | 27,370 | ||||||||||||||||||||
Net interest margin (7) | 3.24 | % | 3.24 | % |
(1) | Interest income is presented on a | |
(2) | Loans are stated net of unearned income. | |
(3) |
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(4) | Loan fees included in interest income are not | |
(5) | The yields for securities that are classified as available for sale is based on the average historical amortized cost. | |
(6) | Interest rate spread represents the difference between the average yield on interest earning assets and the cost of interest bearing liabilities and is presented on a tax equivalent basis. | |
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Nine Months Ended | ||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
(dollars in thousands) | Balance | Interest | Cost | Balance | Interest | Cost | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Earning assets (2)(3) | ||||||||||||||||||||||||
Loans-taxable (4) | $ | 687,744 | $ | 20,783 | 4.03 | % | $ | 681,638 | $ | 19,913 | 3.90 | % | ||||||||||||
Loans-tax free (4) | 40,686 | 1,462 | 4.79 | % | 48,060 | 1,623 | 4.50 | % | ||||||||||||||||
Total loans (1)(2) | 728,430 | 22,245 | 4.07 | % | 729,698 | 21,536 | 3.94 | % | ||||||||||||||||
Securities-taxable | 287,639 | 5,791 | 2.68 | % | 261,271 | 4,944 | 2.52 | % | ||||||||||||||||
Securities-tax free | 1,418 | 64 | 5.98 | % | 1,033 | 45 | 5.81 | % | ||||||||||||||||
Total securities (1)(5) | 289,057 | 5,855 | 2.70 | % | 262,304 | 4,989 | 2.54 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 19,781 | 146 | 0.98 | % | 4,189 | 14 | 0.45 | % | ||||||||||||||||
Total earning assets | 1,037,268 | 28,246 | 3.63 | % | 996,191 | 26,539 | 3.55 | % | ||||||||||||||||
Non-earning assets | 100,422 | 108,140 | ||||||||||||||||||||||
Allowance for loan and lease losses | (8,526 | ) | (8,737 | ) | ||||||||||||||||||||
Total assets | $ | 1,129,164 | $ | 1,095,594 | ||||||||||||||||||||
Liabilities and shareholders' equity | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 492,367 | 1,248 | 0.34 | % | $ | 421,040 | 673 | 0.21 | % | ||||||||||||||
Savings deposits | 102,447 | 102 | 0.13 | % | 96,340 | 62 | 0.09 | % | ||||||||||||||||
Time deposits | 199,897 | 1,163 | 0.78 | % | 212,100 | 1,274 | 0.80 | % | ||||||||||||||||
Total interest-bearing deposits | 794,711 | 2,513 | 0.42 | % | 729,480 | 2,009 | 0.37 | % | ||||||||||||||||
Borrowed funds and other interest-bearing liabilities | 74,588 | 966 | 1.73 | % | 111,451 | 1,132 | 1.35 | % | ||||||||||||||||
Total interest-bearing liabilities | 869,299 | 3,479 | 0.53 | % | 840,931 | 3,141 | 0.50 | % | ||||||||||||||||
Demand deposits | 154,828 | 148,659 | ||||||||||||||||||||||
Other liabilities | 10,665 | 14,012 | ||||||||||||||||||||||
Shareholders' equity | 94,372 | 91,992 | ||||||||||||||||||||||
Total liabilities and shareholder's equity | $ | 1,129,164 | $ | 1,095,594 | ||||||||||||||||||||
Net interest income/interest rate spread (6) | 24,767 | 3.10 | % | 23,398 | 3.05 | % | ||||||||||||||||||
Tax-equivalent adjustment | (519 | ) | (567 | ) | ||||||||||||||||||||
Net interest income as reported | $ | 24,248 | $ | 22,831 | ||||||||||||||||||||
Net interest margin (7) | 3.18 | % | 3.13 | % |
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(7) | Net interest income as a percentage of total average interest earning assets. |
Rate Volume Analysis
The most significant impact on net income between periods is derived from the interaction of changes in the volume and rates earned or paid on interest-earning assets and interest-bearing liabilities. The volume of earning assets, specifically loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in net interest income between periods. Components of interest income and interest expense are presented on a tax-equivalent basis using the statutorycorporate federal income tax rate of 34%21%.
The following table summarizes the effect that changes in volumes of earning assets and interest-bearing liabilities and the interest rates earned and paid on these assets and liabilities have on net interest income. The net change or mix component attributable to the combined impact of rate and volume changes has been allocated proportionately to the change due to volume and the change due to rate.
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||
2017 vs. 2016 | 2017 vs. 2016 | 2019 vs. 2018 | 2019 vs. 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||
Due to | Due to | Total | Due to | Due to | Total | Due to | Due to | Total | Due to | Due to | Total | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Volume | Rate | Change | Volume | Rate | Change | ||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Volume | Rate | Change | Volume | Rate | Change | ||||||||||||||||||||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans - taxable | $ | 157 | $ | 358 | $ | 515 | $ | 180 | $ | 690 | $ | 870 | $ | (245 | ) | $ | 356 | $ | 111 | $ | 89 | $ | 1,480 | $ | 1,569 | |||||||||||||||||||||||
Loans - tax free | (112 | ) | 56 | (56 | ) | (260 | ) | 99 | (161 | ) | (193 | ) | 37 | (156 | ) | (124 | ) | 28 | (96 | ) | ||||||||||||||||||||||||||||
Total loans | 45 | 414 | 459 | (80 | ) | 789 | 709 | (438 | ) | 393 | (45 | ) | (35 | ) | 1,508 | 1,473 | ||||||||||||||||||||||||||||||||
Securities - taxable | 199 | 149 | 348 | 518 | 329 | 847 | (264 | ) | 77 | (187 | ) | (494 | ) | 91 | (403 | ) | ||||||||||||||||||||||||||||||||
Securities - tax free | (5 | ) | 2 | (3 | ) | 17 | 2 | 19 | (1 | ) | 1 | - | 23 | (1 | ) | 22 | ||||||||||||||||||||||||||||||||
Total securities | 194 | 151 | 345 | 535 | 331 | 866 | (265 | ) | 78 | (187 | ) | (471 | ) | 90 | (381 | ) | ||||||||||||||||||||||||||||||||
Interest-bearing deposits in other banks | 1 | 15 | 16 | 100 | 32 | 132 | 20 | (7 | ) | 13 | 133 | (30 | ) | 103 | ||||||||||||||||||||||||||||||||||
Total interest income | 240 | 580 | 820 | 555 | 1,152 | 1,707 | (683 | ) | 464 | (219 | ) | (373 | ) | 1,568 | 1,195 | |||||||||||||||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | 43 | 196 | 239 | 129 | 446 | 575 | (1 | ) | 290 | 289 | 65 | 1,175 | 1,240 | |||||||||||||||||||||||||||||||||||
Savings deposits | 1 | 7 | 8 | 4 | 36 | 40 | (1 | ) | (1 | ) | (2 | ) | (8 | ) | 3 | (5 | ) | |||||||||||||||||||||||||||||||
Time deposits | (28 | ) | 20 | (8 | ) | (72 | ) | (39 | ) | (111 | ) | (95 | ) | 150 | 55 | 302 | 986 | 1,288 | ||||||||||||||||||||||||||||||
Total interest-bearing deposits | 16 | 223 | 239 | 61 | 443 | 504 | (97 | ) | 439 | 342 | 359 | 2,164 | 2,523 | |||||||||||||||||||||||||||||||||||
Borrowed funds and other interest-bearing liabilities | (128 | ) | 84 | (44 | ) | (431 | ) | 265 | (166 | ) | (404 | ) | 79 | (325 | ) | (1,389 | ) | 495 | (894 | ) | ||||||||||||||||||||||||||||
Total interest expense | (112 | ) | 307 | 195 | (370 | ) | 708 | 338 | (501 | ) | 518 | 17 | (1,030 | ) | 2,659 | 1,629 | ||||||||||||||||||||||||||||||||
Net interest income | $ | 352 | $ | 273 | $ | 625 | $ | 925 | $ | 444 | $ | 1,369 | $ | (182 | ) | $ | (54 | ) | $ | (236 | ) | $ | 657 | $ | (1,091 | ) | $ | (434 | ) |
Provision for Loan and Lease Losses
Management closely monitors the loan portfolio and the adequacy of the ALLL by considering the underlying financial performance of the borrower, collateral values and associated credit risks. Future material adjustments may be necessary to the provision for loan and lease losses and the ALLL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ALLL. The provision for loan and lease losses is an expense charged against net interest income to provide for probable losses attributable to uncollectible loans and is based on management’s analysis of the adequacy of the ALLL. A credit to loan and lease losses reflects the reversal of amounts previously charged to the ALLL.
FNCB recorded a provision for loan and lease losses of $543 thousand$0.6 million for the three-month period ended September 30, 2019, a decrease of $0.5 million, or 44.6%, compared to a provision of $1.1 million for the three months ended September 30, 2017, compared to a credit2018. The provision for loan and lease losses amounted to $0.8 million for the nine months ended September 30, 2019, a decrease of $234 thousand$1.9 million, or 69.8%, from $2.7 million for the same period of 2016. The provision recorded for the third quarter of 2017 resulted primarily from strong loan growth, coupled with net charge-offs of $150 thousand, during the period. For the year-to-date periods ended September 30, 2017 and 2016, FNCB recorded provision expenses of $486 thousand and $858 thousand, respectively. The provision expense for the first nine months of 20172018. The reduction in the provision for loan losses for the quarter and year-to-date periods primarily reflected a decrease in loan growth,balances, coupled with a decrease in historical net charge-offs recorded of $43 thousand.charge-off rates.
Non-interest Income
Non-interest income totaled $1.7increased $511 thousand, or 38.7%, to $1.8 million for the three months ended September 30, 2017, an 2019 from $1.3 million for the same three months of 2018. For the nine months ended September 30, 2019, non-interest income increased $556 thousand, or 12.7%, to $4.9million from$4.4 million for the same nine-month period of 2018. Anincrease in net gains realized on the sale of $0.3 million, or 24.2%, from $1.4 million earned duringavailable-for-sale debt securities, higher deposit service charges and other income, were the comparable period in 2016. When comparing the third quarters of 2017 and 2016,predominant factors leading to the increase in non-interest income primarily reflected increasescomparing the quarter and year-to-date periods ending September 30, 2019 and 2018. Also impacting the year-to-date period was a reduction in net gains on the sale of securities of $367 thousand, other income of $28 thousand, and loan-related fees of $11 thousand. Those increases were partially offset by decreases inSBA-guaranteed loans. FNCB realized net gains on the sale of other real estate ownedavailable-for-sale debt securities of $32$379 thousand and $702thousand for the three months and nine months ended September 30, 2019, respectively, compared to net losses of $4 thousand for the nine-month period ended September 30, 2018. There were no gains on the sale of available-for-sale debt securities for the three months ended September 30, 2018. Additionally, FNCB realized net gains on equity securities of $5 thousand and $31thousand for the three and nine months ended September 30, 2019, respectively, compared to net losses of $8 thousand and $34 thousand for the respective periods of 2018. For the nine months ended September 30, 2018, FNCB realized net gains on the sale of SBA guaranteedSBA-guaranteed loans of $28 thousand, and deposit$322 thousand. FNCBdid not sell any SBA-guaranteed loans in the respective periods of 2019. Deposit service charges of $11 thousand.
For the nine months ended September 30, 2017, non-interest income totaled $5.3 million, an increase of $0.5 million,increased $86 thousand, or 10.4%12.1%, compared to $4.8 million for the same nine months of 2016. The improvement resulted primarily from an increase of $378 thousand in net gains on the sale of securities, coupled with increases in other income of $90 thousand. Additionally, net gains on the sale of other real estate owned SBA guaranteed loans each increased $28 thousand comparing the year-to-date periodsthird quarters of 20172019 and 2016. In addition, FNCB recorded net gains on the sales of other repossessed assets of $47 thousand. Partially offsetting these positive factors were decreases in loan-related fees of $35 thousand2018, and income from bank-owned life insurance of $27 thousand.
Non-interest Expense
For the three months ended September 30, 2017, non-interest expense decreased $0.2 million, or 2.4%, to $6.4 million, from $6.6 million for the same three months of 2016. Comparing the three months ended September 30, 2017 and 2016, the decline in 2017 was due primarily to a decrease in occupancy expense of $85 thousand, resulting from a decrease in rent expense associated with long-term facilities planning, coupled with a reduction in legal expenses of $56 thousand, as outstanding litigation continues to be resolved. FNCB also experienced decreases of $39 thousand in regulatory assessments, $38 thousand in advertising expenses, and $18 thousand in other losses. Partially offsetting these decreases were increases in professional fees of $49 thousand and equipment expense of $45 thousand.
On a year-to-date basis, non-interest expense declined $117$43 thousand, or 0.6%2.0%, comparing the nine months ended September 30, 20172019 and 2016. Positive fluctuations within2018.
During the third quarter of 2019, management engaged an independent third party under a revenue share agreement to conduct an evaluation of FNCB’s non-interest revenue streams and fee structure to identify opportunities for enhancement. The initial assessment has been completed and recommendations have been provided and approved by management. Implementation of the approved recommendations will be finalized in the fourth quarter of 2019.
Non-interest Expense
Non-interest expense increased $141 thousand, or 2.0%, to $7.3 million for the three months ended September 30, 2019 from $7.2 million for the same three months of 2018. The change primarily reflected an increase of $330 thousand, or 9.2%, in salaries and employee benefits expense, to $3.9 million for the three months ended September 30, 2019 from $3.6 million for the same three months of 2018 due to staff additions in 2019. Also contributing to the increase in non-interest expense includewas a decrease$151 thousand increase in director fees to $236 thousand for the third quarter of 2019 from $85 thousand for the same quarter of 2018. On July 1, 2019, FNCB granted 1,956 shares of FNCB's common stock under the the Company's Long-Term Incentive Compensation Plan ("LTIP") to each of the Bank's ten non-employee directors for a total of 19,560 shares. The fair value on the grant date was $7.67 per share. Accordingly, FNCB recorded directors fees of $150 thousand as part of this grant during the third quarter of 2019. Partially offsetting these increases were reductions in regulatory assessments and occupancy expenses. For the three months ended September 30, 2019, regulatory assessments decreased $230 thousand, or 91.6%, to $21 thousand in 2019 from$251 thousand for the same period of 2018, primarily due to the small bank assessment credit, coupled with a reduction in the FDIC deposit insurance assessment rate resulting from FNCB's improved capital position. Comparing the third quarters of 2019 and 2018, occupancy expense decreased $40 thousand, or 8.0%, due toreductions in depreciation on leasehold improvements, building maintenance and utility expenses.
For the nine months ended September 30, 2019, non-interest expenseincreased $490 thousand, or 2.3%, to $21.9 million from $21.4 million for the same nine months of 2018. Similar to the third quarter comparison, the increase for the year-to-date period was largely due toincreases in salaries and employee benefits of $297$902 thousand, or 2.9% due8.4%, to open positions$11.6 million for the nine months ended September 30, 2019 from $10.7 million for the same period of 2018, and a decline in severance costs, a decrease of $170$149 thousand, or 59.6%58.2%, increase in legal expense, and a reductiondirectors fees following the grant of $132shares of common stock under the LTIP. Additionally, data processing expenses increased$272 thousand, or 20.9%13.4%, in regulatory assessments. During 2016, FNCB converted from a national charter to a state charter, which, along with improved risk profile, contributed to the reduction$2.3 million in regulatory expenses for the firstnine months ended September 30, 2019 from $2.0 million for the same nine months of 2017 as compared to 2016. In addition,2018. Partially offsetting these increases comparing the resolution of outstanding litigation continues to provide fornine months ended September 30, 2019 and 2018 were reductions in legal expenses. Partially offsetting the decreases to non-interest expense were increases in occupancy and equipment expenseregulatory assessments of $266 $383thousand, or 20.5%59.1%, and $103occupancy expense of$175 thousand, or 8.1%, in equipment expense, respectively, reflecting enhancements made to and expansion of infrastructure as part of FNCB’s network improvement program. In addition, FNCB experienced increases of $100 thousand in other losses due primarily to software abandonment costs, and $97 thousand in expenses of other real estate owned due primarily to valuation adjustments.10.7%.
Provision for Income Taxes
FNCB recorded a provision for income tax expense of $2.5$1.6 million for the nine months ended September 30, 2017,2019, an increase of $0.9 million$260 thousand, or 19.6%, compared to an income tax expense of $1.6$1.3 million for the same period of 2018. The increase in income tax expense primarily reflected an increase in pre-tax net income of $1.6 million, or 20.5%, when comparing the nine months of 2016.ended September 30, 2019 and 2018.
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently, if necessary, in accordance with guidance set forth in ASC Topic 740 “Income“Income Taxes,” and applies the criteria in the guidance to determine whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management determines based on available evidence, both positive and negative, that it is more likely than not that some portion or all of the deferred tax asset will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s estimates and judgments used in their evaluation of both positive and negative evidence.
In evaluating available evidence, management considers, among other factors, historical financial performance, expectation of future earnings, the ability to carry back losses to recouprecoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. In assessing the need for a valuation allowance, management carefully weighs both positive and negative evidence currently available.
Management performed an evaluation of FNCB’sFNCB’s deferred tax assets at September 30, 20172019 taking into consideration both positive and negative evidence that existed as of that date. Based on this evaluation, management believes that FNCB’s future taxable income will be sufficient to utilize deferred tax assets. FNCB’s core earnings in 2016 and the first nine months of 2017 were strong, and management believes projected future core earnings will continue to support the recognition of the deferred tax assets based on future growth projections. Accordingly, management concluded that no valuation allowance for deferred tax assets was required at September 30, 2017.
FNCB uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. On September 27, 2017, the Trump Administration released a tax reform framework that includes a reduction in the U.S. corporate income tax rate to 20.0%2019. If corporate tax rates are reduced, management expects FNCB would be required to record an initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would record lower tax provisions on an ongoing basis. The House of Representatives is currently working on a draft of the bill, which is expected to be addressed by Congress later in 2017. It is too early to determine if any of the proposals on tax reform are actionable, or if acted upon, the specific tax reforms that would be implemented. Accordingly, management cannot assess the effect that any tax reform measure effectuated would have on FNCB’s operating results or financial position at the present time.
FINANCIAL CONDITION
Assets
Total assets decreased $38.5$40.5 million, or 3.2%3.3%, to $1.157$1.197 billion at September 30, 20172019 from $1.196$1.238 billion at December 31, 2016.2018. The change in total assets primarily resulted from a $68.6 million, or 61.0%, reductionreflected decreases in loans and available-for sale debt securities, partially offset by anincrease in cash and cash equivalents and other assets. Net loans decreased $2.0 million, or 0.2%, to $827.6 million at September 30, 2019 from $829.6 million at December 31, 2018, which primarily reflected the planned runoff of indirect automobile loan balances and the anticipated payoff of two large municipal loans, partially offset by growth in construction, land acquisition and development loans. Available-for-sale debt securities decreased $41.4 million, or 14.0%, to $254.6 millionat September 30, 2019 from $296.0 million at December 31, 2018. Market opportunities allowed for the sale of securities to supplement cyclical deposit trends, minimize wholesale funding utilization and record additional non-interest income. Bank premises and equipment, net increased $2.8 million, or 19.7%, which largely reflected a decrease in total depositsthe completion of $31.9the new Main Office. Other assets increased $2.6 million, or 3.2%25.0%, coupledto $12.7 million at September 30, 2019 from $10.1 million at December 31, 2018, which was largely due to the capitalization of the right of use assets associated with FNCB's operating leases upon the repaymentadoption of borrowed funds of $18.2new accounting guidance for leases that became effective on January 1, 2019. Total depositsdecreased by $131.6 million, or 23.1%.12.0%, to $964.1 million at September 30, 2019 from $1.096 billion at December 31, 2018. The depositdecrease in total deposits was primarily attributable to cyclical net outflows of municipal deposits and a reduction in the anticipated exitutilization of short-termwholesale brokered deposits. Conversely, borrowed funds related to the sale of a municipal utility in December 2016. Available-for-sale securities increased $6.0$55.5 million, or 2.2%162.2%, and net loans increased $27.8to $89.8 million or 3.8%. Additional asset fluctuations included a decrease in other real estate owned of $1.0at September 30, 2019 as compared to $34.2 million as foreclosed properties were sold, a $3.4 million reduction in net deferred tax assets, and a $1.5 million increase in other assets. at December 31, 2018.
Cash and Cash Equivalents
Cash and cash equivalents declined $68.6increased $1.0 million, or 61.0%2.8%, to $43.8$37.5 million at September 30, 20172019 from $112.4$36.5 million at December 31, 2016.2018. The significant reductionincrease was due primarily to proceeds received from the capital raise, from sale and repayments of available-for-sale debt securities, net of purchases and an anticipated decreaseincrease in deposits as noted above.borrowed funds, partially offset by cyclical reductions in deposits. FNCB paid dividends of $0.03$0.05 per share and $0.09$0.15 per share for the three months and nine months ended September 30, 2017,2019, respectively, an increase of 50.0% as25.0% compared to dividends of $0.02$0.04 per share and $0.06$0.12 per share for the respective periods of 2016.2018.
Securities
FNCB’sFNCB’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and interest income to increase profitability. Additionally, the investment securities portfolio is used to meet pledging requirements to secure public deposits and for other purposes. Management classifies investmentDebt securities are classified as either held-to-maturity or available-for-sale at the time of purchase based on itsmanagement's intent. Held-to-maturity securities are carried at amortized cost, while available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a component of shareholders’ equity in accumulated other comprehensive income (loss), net of tax. At September 30, 20172019 and December 31, 2016,2018, all debt securities were classified as available-for-sale. Equity securities with readily determinable fair values are carried at fair value, with gains and losses due to fluctuations in market value included in the consolidated statements of income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. Decisions to purchase or sell investment securities are based upon management’s current assessment of long- and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost.
At September 30, 2017,2019, the investment portfolio was comprised principally of fixed-rate and floating-rate securities issued by U.S. government or U.S. government-sponsored agencies, which include mortgage-backed securities and residential and commercial collateralized mortgage obligations (“CMOs”), fixed-rate taxable obligations of state and political subdivisions and corporate debt securities. Except for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders’ equity at September 30, 2017.2019.
The following table presents the carrying value of debt securities, all of which were classified as available-for-sale securities, which areand carried at fair value at September 30, 20172019 and December 31, 2016:2018:
Composition of the Investment Portfolio
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
Available-for-sale securities | ||||||||||||||||
Obligations of U.S. government agencies | $ | - | $ | 12,188 | ||||||||||||
Available-for-sale debt securities | ||||||||||||||||
Obligations of state and political subdivisions | 144,700 | 117,873 | $ | 101,683 | $ | 152,187 | ||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||
Collateralized mortgage obligations - residential | 35,272 | 18,084 | 66,840 | 34,207 | ||||||||||||
Collateralized mortgage obligations - commerical | 66,459 | 99,350 | ||||||||||||||
Collateralized mortgage obligations - commercial | 43,822 | 73,640 | ||||||||||||||
Mortgage-backed securities | 22,522 | 20,576 | 18,745 | 23,934 | ||||||||||||
Private collateralized mortgage obligations | 10,063 | 2,913 | ||||||||||||||
Corporate debt securities | 5,445 | 3,792 | 6,101 | 4,936 | ||||||||||||
Asset-backed securities | 3,512 | - | 5,229 | 1,802 | ||||||||||||
Negotiable certificates of deposit | 3,192 | 3,216 | 2,183 | 2,413 | ||||||||||||
Equity securities | 935 | 936 | ||||||||||||||
Total | $ | 282,037 | $ | 276,015 | ||||||||||||
Total available-for-sale debt securities | $ | 254,666 | $ | 296,032 |
Management monitors the investment portfolio regularly and adjusts the investment strategy to reflect changes in liquidity needs, asset/liability strategy and tax planning requirements. FNCB currently has $50.4$30.0 millionin net operating loss (“NOL”("NOL") carryovers, which it uses to offset any taxable income. Because of this tax position, there is no benefit from holding tax-exempt obligations of state and political subdivisions. Accordingly, management’smanagement actions during recent periods with regard to managing the investment portfolio have reflected current tax planning initiatives focused on generating sustained taxable income to be able to reduce NOL carryovers.
Market opportunities during the three and nine months ended September 30, 2019 provided management with the ability to sell lower-yielding securities at a gain and reinvest a portion of the proceeds into higher yielding securities within FNCB's risk tolerance. Additionally, the current ALCO strategy involves utilizing FNCB's security portfolio to shorten FNCB's short-term liability sensitivity. During the third quarter of 2017,three months ended September 30, 2019, FNCB sold 17 of its26 available-for-sale debt securities including 14 U.S. government agency securities and three19 taxable obligations of state and political subdivisions.subdivisions and seven U.S. government/government-sponsored agency mortgage-backed securities and CMOs. The securities sold had an aggregate amortized cost of $54.1 million. Gross$40.7 million with a weighted-average yield of 2.20%. For the third quarter of 2019, gross proceeds received totaled $54.5$41.1 million, with a net gainsgain of $0.4 million$379 thousand realized upon the sales and included in non-interest income.
For the ninethree months ended September 30, 2017, there were2019, purchases of available-for-sale debt securities totaled $11.3 million with a totalweighted-average yield of 37 securities sold, comprised of 282.64%, including two U.S. government agency securities, eightgovernment/government-sponsored CMOs, one taxable obligations of state and political subdivisions and one corporate bond. Gross proceeds received on the sales and the aggregate amortized cost of the securities sold totaled $131.0 million and $129.6 million, respectively. Year-to-date net gains realized upon the sales amounted to $1.3 million and are included in non-interest income forprivate asset-backed security.
During the nine months ended September 30, 2017.
2019, FNCB purchased 18sold 66available-for-saledebt securities, during the third quarter of 2017 totaling $53.4 million, including $51.6 million in U.S. government/ government-sponsored agency securities and $1.7 million in51 taxable obligations of state and political subdivisions.subdivisions and 14 U.S. government/government-sponsored agency mortgage-backed securities and CMOs. The securities sold had an aggregate amortized cost of $101.6 million and a weighted average yield 2.43%. Gross proceeds received totaled$102.3 million, with net gains of $702 thousand realized upon the sales, which was included in non-interest income. For the nine months ended September 30, 2017,2019, FNCB purchased 65 13securities totaling $139.5with an aggregate amortized cost of $55.8 million and a weighted-average yield of 2.94%. The purchases included eightU.S. government agency CMOs,oneprivate CMO, two asset-backed securities, one state and political subdivisions and onecorporate bond. In order to mitigate FNCB's short-term liability sensitivity, sixof the eight U.S. government agency bonds purchased with an aggregate cost of$30.6million were floating-rate securities issued by GNMA. Additionally, at September 30, 2019, FNCB committed to purchase three securities, when issued, including $35.8 million intwo taxable obligations of state and political subdivisions $97.7and one private CMO with an aggregate cost of $6.0 million in U.S. government /government-sponsored agency securities, $4.0 millionand a weighted-average yield of asset-backed securities, and $2.0 million in corporate debt securities.
2.78%.
The following table presents the maturities of available-for-sale debt securities, based on carrying value at September 30, 20172019 and the weighted average yields of such securities calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. The yields on tax-exempt obligations of state and political subdivisions are presented on a tax-equivalent basis using an effective interestthe federal corporate income tax rate of 34.0%21.0%. Because residential, commercial and commercialprivate collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary.
Maturity Distribution of the Investment Portfolio
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations, | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-Backed | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Within | >1 - 5 | a6 - 10 | Over | and Asset-Backed | No Fixed | September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | One Year | Years | Years | 10 Years | Securities | Maturity | Total | Within One Year | >1 - 5 Years | 6 - 10 Years | Over 10 Years | Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities | Total | |||||||||||||||||||||||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||||||||||||
Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale debt securities | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | - | 26,423 | 118,277 | - | - | - | 144,700 | $ | 1,004 | $ | 41,666 | $ | 54,940 | $ | 4,073 | $ | - | $ | 101,683 | |||||||||||||||||||||||||||||||||
Yield | 2.48 | % | 2.81 | % | 2.75 | % | 2.30 | % | 2.79 | % | 2.92 | % | 3.58 | % | 2.89 | % | ||||||||||||||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | - | - | - | - | 35,272 | - | 35,271 | - | - | - | - | 66,840 | 66,840 | |||||||||||||||||||||||||||||||||||||||
Yield | 2.80 | % | 2.80 | % | �� | 2.82 | % | 2.82 | % | |||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | - | - | - | - | 66,459 | - | 66,459 | - | - | - | - | 43,822 | 43,822 | |||||||||||||||||||||||||||||||||||||||
Yield | 2.49 | % | 2.49 | % | 2.49 | % | 2.49 | % | ||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | - | - | - | - | 22,522 | - | 22,522 | - | - | - | - | 18,745 | 18,745 | |||||||||||||||||||||||||||||||||||||||
Yield | 2.86 | % | 2.86 | % | 3.06 | % | 3.06 | % | ||||||||||||||||||||||||||||||||||||||||||||
Private collateralized mortgage obligations | - | - | - | - | 10,063 | 10,063 | ||||||||||||||||||||||||||||||||||||||||||||||
Yield | 3.16 | % | 3.16 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | - | - | 4,100 | 1,345 | - | - | 5,445 | - | - | 6,101 | - | - | 6,101 | |||||||||||||||||||||||||||||||||||||||
Yield | 6.63 | % | 9.50 | % | 7.20 | % | 6.46 | % | 6.46 | % | ||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | 3,512 | - | 3,512 | - | - | - | - | 5,229 | 5,229 | |||||||||||||||||||||||||||||||||||||||
Yield | 2.45 | % | 2.45 | % | 2.98 | % | 2.98 | % | ||||||||||||||||||||||||||||||||||||||||||||
Negotiable certificates of deposit | 248 | 2,944 | - | - | - | - | 3,192 | 2,183 | - | - | - | - | 2,183 | |||||||||||||||||||||||||||||||||||||||
Yield | 1.45 | % | 2.09 | % | 2.04 | % | 2.17 | % | 2.17 | % | ||||||||||||||||||||||||||||||||||||||||||
Equity securities | - | - | - | - | - | 935 | 935 | |||||||||||||||||||||||||||||||||||||||||||||
Yield | 3.45 | % | 3.45 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Total available-for-sale maturities | $ | 248 | $ | 29,367 | $ | 122,377 | $ | 1,345 | $ | 127,765 | $ | 935 | $ | 282,037 | ||||||||||||||||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 3,187 | $ | 41,666 | $ | 61,041 | $ | 4,073 | $ | 144,699 | $ | 254,666 | ||||||||||||||||||||||||||||||||||||||||
Weighted average yield | 1.45 | % | 2.44 | % | 2.94 | % | 9.50 | % | 2.64 | % | 3.45 | % | 2.78 | % | 2.21 | % | 2.79 | % | 3.27 | % | 3.58 | % | 2.78 | % | 2.91 | % |
OTTI Evaluation
There was no OTTI recognized during the nine months ended September 30, 20172019 or 2016.2018. For additional information regarding management’s evaluation of securities for OTTI, see Note 3, “Securities” of the notes to consolidated financial statements included in Item 1 hereof.
InvestmentThe following table presents the investment in FHLB of Pittsburgh stock hasFNCB’s restricted securities, which have limited marketability and isare carried at cost. FNCB’s investment in FHLB of Pittsburgh stock totaled $2.5 million and $3.3 millioncost, at September 30, 20172019 and December 31, 2016, respectively. 2018:
September 30, | December 31, | |||||||
(in thousands) | 2019 | 2018 | ||||||
Stock in Federal Home Loan Bank of Pittsburgh | $ | 4,184 | $ | 3,113 | ||||
Stock in Atlantic Community Banker's Bank | 10 | 10 | ||||||
Total restricted securities, at cost | $ | 4,194 | $ | 3,123 |
Management noted no indicators of impairment for the FHLBFederal Home Loan Bank of Pittsburgh or Atlantic Community Banker’s Bank stock at September 30, 2017.2019 and December 31, 2018.
During the third quarter of 2017, FNCB purchased $1.2owns a $1.7 million representing a 4.9% interest,investment in the common stock of a privately-held bank holding company. The common stock was purchased during 2017 as part of a private placement pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, for offerings not involving any public offering. The common stock of such bank holding company is not currently traded on any established market and is not expected to be traded in the near future on any securities exchange or established over-the-counter market. FNCB has elected to account for this transaction as an investment in an equity security without a readily determinable fair value. An equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired, and thewith a fair value of the investment is less than its carrying value. The $1.2$1.7 million investment is included in other assets in the consolidated statements of financial condition at September 30, 2017. Management2019 and December 31, 2018. As part of its qualitative assessment, management engaged an independent third party to provide a valuation of this investment as of September 30, 2017. The valuation2019, which indicated that the investment was not impaired and accordingly,impaired. Management determined that no adjustment for impairment iswas required at September 30, 2017.2019.
Loans
ForTotal loans, grossdecreased $0.9 million, or 0.1%, to $834.3 million at September 30, 2019 from $835.2 million at December 31, 2018 due largely to the first nine monthsplanned runoff of 2017,indirect automobile loans the anticipated payoffs of two large municipal loans, which more than entirely offset new loan originations. FNCB experienceddid experience moderate to strong loan growth amongin its construction, land acquisition and development, commercial real estate secured and consumer lending, only partially offsetcommercial and industrial portfolios, however this growth was overshadowed by a declinethe reductions in the commercial and industrialconsumer and state and political subdivision segments, resulting in an increase in total loans of 3.4%. Total loans grew to $756.9 million at September 30, 2017, a $28.1 million increase from $728.8 million at December 31, 2016. Commercial real estate and construction, land acquisition and development loans grew by 4.1% and 46.0%, respectively, during 2017, as the commercial lending team added depth and experience, and the Lehigh Valley loan production office was opened. Contributing to the strong growth in residential real estate loans during 2017, FNCB launched a “No Closing Costs Loan Sale” for its “WOW Mortgage,” a non-saleable, fixed-rate mortgage with terms of 7.5, 10 or 14.5 years, and its home equity loan products.portfolios.
Historically, commercial lending activities have representedrepresent a significantsignificant portion of FNCB’s loan portfolio. Commercial lending includes commercial and industrial loans, commercial real estate loans and construction, land acquisition and development loans, and represented 56.4%57.8% and 56.7%52.0% of total loans at September 30, 20172019 and December 31, 2016, respectively.2018.
From a collateral standpoint, a majority of FNCB’s loan portfolio consists of loans secured by real estate. Real estate secured loans, which include commercial real estate, construction, land acquisition and development, residential real estate loans and home equity lines of credit (“HELOCs”), increased $25.6$33.8 million, or 6.0%7.2%, to $455.7$501.9 million at September 30, 20172019 from $430.1$468.1 million at December 31, 2016.2018. The increase was attributable to both the residentialconcentrated in construction, land acquisition and development loans and commercial real estate segments, as detailed above.loans. Real estate secured loans as a percentagerepresented 60.2% and 56.0% of total gross loans increase to 60.2% at September 30, 2017 as compared to 59.0% as of 2019 and December 31, 2016.2018, respectively.
Construction, land acquisition and development loans increased $18.6 million, or 89.2%, to $39.4 million at September 30, 2019 from $20.8 million at December 31, 2018, while commercial real estate loans grew $16.8 million, or 6.4%, to $279.6 million at September 30, 2019 from $262.8 million at December 31, 2018. Commercial real estate loans include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. Commercial and industrial loans, decreased $4.7 million, or 3.1%, during the first nine months of 2017 to $146.0 million at September 30, 2017 from $150.8 million at December 31, 2016. The decrease resulted primarily from the planned exit of a large commercial relationship during the first quarter of 2017. Commercial and industrial loanswhich consist primarily of equipment loans, working capital financing, revolving lines of credit and loans secured by cash and marketable securities. Loans secured by commercial real estate securities, increased $10.0$12.5 million, or 4.1%8.3%, to $253.8$163.5 million at September 30, 20172019 from $243.8$151.0 million at December 31, 2016. Commercial real estate loans include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. Construction, land acquisition and development loans also increased $8.4 million, or 46.0%, to $26.8 million at September 30, 2017 from $18.4 million at December 31, 2016, as several large commercial projects were started, and existing projects approach completion.2018.
Residential real estate loans totaled $152.3$165.8 million at September 30, 2017,2019, an increase of $8.0$1.0 million, or 5.5%0.6%, from $144.3$164.8 million at December 31, 2016.2018. The components of residential real estate loans include fixed-rate and variable-rate, amortizing mortgage loans. HELOCs are not included in this category but are included in consumer loans. FNCB primarily underwrites fixed-rate purchase and refinance of residential mortgage loans for sale in the secondary market to reduce interest rate risk and provide funding for additional loans. Additionally, FNCB offers aits proprietary “WOW” mortgage product, which is a non-saleable mortgage with maturity terms of 7.5 to 14.519.5 years and offersthat provides customers with an attractive fixed interest rate, low closing costs and a guaranteed 30-day close.
Consumer loans, grew throughout the first nine monthswhich are primarily comprised of 2017, increasing $10.9indirect automobile loans and HELOCs,decreased by $28.4 million, or 8.5%16.0%, to $138.7 $148.4million at September 30, 20172019 from $127.8$176.8 million at December 31, 2016. The increase2018.The majority of this decrease was attributable to the purchase of a pool of refinanced student loans of $5.0 million, in addition to seasonal increasesconcentrated within the indirect auto lending portfolio. Loansloan portfolio, as FNCB did not aggressively compete for these loans throughout 2019. The balance of indirect automobile loansdecreased $26.4 million, or 17.0%, to $128.7 million at September 30, 2019 from $155.1 million at December 31, 2018. Due to the anticipated payoff of two large municipal loan relationships in the second quarter of 2019, loans to state and municipal governmentspolitical subdivisions decreased $4.4$21.4 million, or 10.2%36.3%, to $39.3$37.6 million at September 30, 20172019 from $43.7$59.0 million at December 31, 2016, due in part to the payoff of a large tax-anticipation note.2018.
The following table summarizespresents loans receivable, net by major category at September 30, 20172019 and December 31, 2016:2018:
Loan Portfolio Detail
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
Residential real estate | $ | 152,257 | $ | 144,260 | $ | 165,850 | $ | 164,833 | ||||||||
Commercial real estate | 253,791 | 243,830 | 279,591 | 262,778 | ||||||||||||
Construction, land acquisition and development | 26,805 | 18,357 | 39,371 | 20,813 | ||||||||||||
Commercial and industrial | 146,048 | 150,758 | 163,464 | 150,962 | ||||||||||||
Consumer | 138,734 | 127,844 | 148,435 | 176,784 | ||||||||||||
State and political subdivisions | 39,271 | 43,709 | 37,636 | 59,037 | ||||||||||||
Total loans, gross | 756,906 | 728,758 | 834,347 | 835,207 | ||||||||||||
Unearned income | (84 | ) | (48 | ) | (71 | ) | (70 | ) | ||||||||
Net deferred loan costs | 2,667 | 2,569 | 2,601 | 3,963 | ||||||||||||
Allowance for loan and lease losses | (8,862 | ) | (8,419 | ) | (9,315 | ) | (9,519 | ) | ||||||||
Loans, net | $ | 750,627 | $ | 722,860 | $ | 827,562 | $ | 829,581 |
Under industry regulations, a concentration is considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Typically,, industry guidelines require disclosure of concentrations of loans exceeding 10.0% of total loans outstanding. FNCB had no such concentrations at September 30, 2019 or December 31, 2016, 2015 and 2014.2018. In addition to industry guidelines, FNCB’s internal policy considers a concentration to exist in its loan portfolio if an aggregate loan balance outstanding to borrowers within a specific industry exceeds 25.0% of capital. However, management regularly reviews loans by all industry categories to determine if a potential concentration exists.
The following table presents industry concentrations within FNCB’s loan portfolio at September 30, 20172019 and December 31, 2016:2018:
Loan Concentrations
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||
(dollars in thousands) | Amount | % of Gross Loans | Amount | % of Gross Loans | ||||||||||||||||||||||||||||
(in thousands) | Amount | % of Gross Loans | Amount | % of Gross Loans | ||||||||||||||||||||||||||||
1-4 family residential investment properties | 44,204 | 5.30 | % | 38,756 | 4.64 | % | ||||||||||||||||||||||||||
Retail space/shopping centers | $ | 43,772 | 5.78 | % | $ | 38,573 | 5.29 | % | $ | 39,704 | 4.76 | % | $ | 48,021 | 5.75 | % | ||||||||||||||||
1-4 family residential investment properties | 30,669 | 4.05 | % | 24,413 | 3.35 | % | ||||||||||||||||||||||||||
Automobile dealers | 20,185 | 2.67 | % | 31,989 | 4.39 | % | ||||||||||||||||||||||||||
Physicians | 26,788 | 3.21 | % | 25,379 | 3.04 | % |
Asset Quality
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by the ALLL. The ALLL is established through a provision for loan and lease losses charged to earnings.
FNCB has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of loan officers, the Chief Credit Officer, the loan review function, and the Credit Risk Management, ALLL, Officers Loan and the ALLL committees,Directors Loan Committees, as well as through oversight fromof the Board of Directors. Management continually evaluates its credit risk management practices to ensure it is reacting to problems in the loan portfolio in a timely manner, although, as is the case with any financial institution, a certain degree of credit risk is dependent in part on local and general economic conditions that are beyond management’s control.
Under FNCB’s risk rating system, loans that are rated pass, special mention, substandard, doubtful, or loss are reviewed regularly as part of the risk management practices. The Credit Risk Management Committee, which consists of key members of management fromfinance, legal, retail lending and credit administration, meetsmeet monthly or more often as necessary to review individual problem credits and workout strategies and provides monthly reports to the Board of Directors.
A loan is considered impaired when it is probable that FNCB will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the note and loan agreement. For purposes of the analysis, all TDRs, loan relationships with an aggregate outstanding balance greater than $100 thousand rated substandard and non-accrual, and loans that are identified as doubtful or loss are considered impaired. Impaired loans are analyzed individually to determine the amount of impairment. For collateral-dependent loans, impairment is measured based on the fair value of the collateral supporting the loans. A loan is considereddetermined to be collateral dependent when repayment of the loan is expected to be provided through the liquidation of the collateral held. For impaired loans that are secured by real estate, external appraisals are obtained annually, or more frequently as warranted, to ascertain a fair value so that the impairment analysis can be updated. Should a current appraisal not be available at the time of impairment analysis, other sources of valuation may be used, including current letters of intent, broker price opinions or executed agreements of sale. For non-collateral-dependent loans, impairment is measured based on the present value of expected future cash flows, net of any deferred fees and costs, discounted at the loan’s original effective interest rate.
Loans to borrowers that are experiencing financial difficulty that are modified and result in the granting of concessions to the borrowers are classified as TDRs and are considered to be impaired.TDRs. Such concessions generally involve an extension of a loan’s stated maturity date, a reduction of the stated interest rate, payment modifications, capitalization of property taxes with respect to residential mortgage loans or a combination of these modifications. Non-accrual TDRs are returned to accrual status if principal and interest payments, under the modified terms, are brought current, are performing under the modified terms for six consecutive months, and management believes that collection of the remaining interest and principal is probable. FNCB conservatively considers all TDRs to be impaired.
Non-performing loans are monitored on an ongoing basis as part of FNCB’s loan review process. Additionally, work-out efforts for non-performing loans and OREO are actively monitored through the Credit Risk Management Committee. A potential loss on a non-performing asset is generally determined by comparing the outstanding loan balance to the fair market value of the pledged collateral, less cost to sell.
Loans are placed on non-accrual when a loan is specifically determined to be impaired or when management believes that the collection of interest or principal is doubtful. This generally occurs when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection, or when management becomes aware of facts or circumstances that the loan would default before 90 days. FNCB determines delinquency status based on the number of days since the date of the borrower’s last required contractual loan payment. When the interest accrual is discontinued, all unpaid interest income is reversed and charged back against current earnings. Any subsequent cash payments received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts, with any excess treated as a recovery of lost interest. A non-accrual loan is returned to accrual status when the loan is current as to principal and interest payments, is performing according to contractual terms for six consecutive months and future payments are reasonably assured.
Management actively manages impaired loans in an effort to reduce loan balancesmitigate loss to FNCB by working with customers to develop strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means. Real estate values in FNCB’s market area have appeared to stabilize. Employment conditions within the Scranton-Wilkes-Barre-Hazleton metropolitan statistical area, FNCB’s primary market area, have remained steady comparing data for September 2017 with that of September 2016. However, the unemployment rate in FNCB’s primary market area continues to be considerably higher than that of the Commonwealth of Pennsylvania. ManagementIn addition, management monitors employment and economic conditions within FNCB’s market area, as weakening of conditions could result in real estate devaluations and an increase in loan delinquencies, which could negatively impact asset quality and cause an increase in the provision for loan and lease losses.
Under the fair value of collateral method, the impaired amount of the loan is deemed to be the difference between the loan amount and the fair value of the collateral, less the estimated costs to sell. For real estate secured loans, management generally estimates selling costs using a factor of 10% is generally utilized to estimate costs to sell,, which is based on typical cost factors, such as a 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. If the valuation indicates that the fair value has deteriorated below the carrying value of the loan, the difference between the fair value and the principal balance is charged off. For impaired loans for which the value of the collateral less costs to sell exceeds the loan value, the impairment is considereddetermined to be zero.
The following scheduletable presents information about non-performing assets and accruing TDRs at September 30, 20172019 and December 31, 2016:2018:
Non-performing Assets and Accruing TDRs
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | ||||||||||||||
(dollars in thousands) | 2019 | 2018 | ||||||||||||||
Non-accrual loans | $ | 2,642 | $ | 2,234 | $ | 6,119 | $ | 4,696 | ||||||||
Loans past due 90 days or more and still accruing | - | - | - | - | ||||||||||||
Total non-performing loans | 2,642 | 2,234 | 6,119 | 4,696 | ||||||||||||
Other real estate owned | 1,088 | 2,048 | 412 | 919 | ||||||||||||
Other non-performing assets | 1,900 | 2,160 | 1,900 | 1,900 | ||||||||||||
Total non-performing assets | $ | 5,630 | $ | 6,442 | $ | 8,431 | $ | 7,515 | ||||||||
Accruing TDRs | $ | 9,283 | $ | 4,176 | $ | 7,828 | $ | 8,457 | ||||||||
Non-performing loans as a percentage of gross loans | 0.35 | % | 0.31 | % | 0.73 | % | 0.56 | % |
TotalTotal non-performing assets decreased $0.8 million,increased $916 thousand, or 12.6%12.2%, to $5.6$8.4 million at September 30, 20172019 from $6.4$7.5 million at December 31, 2016.2018. The decrease increasewas primarily dueattributable to anincrease in non-accrual loans, partially offset by adecrease in other real estate owned of $1.0 million, or 46.9%. Non-accrualOREO. The increase in non-accrual loans increased by $0.4 million, resultedprimarily attributable to onefrom four large commercial relationship, which was also modified as a TDR duringrelationships that were placed on non-accrual status throughout 2019, partially offset by the nine months ended September 30, 2017.charge off of one non-accrual commercial and industrial loan in the second quarter of 2019. FNCB’s ratio of non-performing loans to total gross loans increased to 0.35%0.73% at September 30, 20172019 from 0.31%0.56% at December 31, 2016.2018. FNCB’s ratio of non-performing assets as a percentage of shareholders’ equityimproved to 5.8%5.9% at September 30, 20172019 from 7.1%8.7% at December 31, 2016.2018, due to increases in FNCB's capital position following the capital raise completed in the first quarter of 2019 and net income generation. Management actively manages problem credits through workout efforts focused on developing strategies to resolve borrower difficulties through liquidation of collateral and other appropriate means. Additionally, management continues to monitor non-accrual loans, delinquency trends and economic conditions within FNCB’s market area on an on-going basis in order to proactively address any collection related issues.collection-related issues and mitigate any potential losses.
Other non-performing assets at September 30, 20172019 and December 31, 2016 include2018 is comprised solely of a classified account receivable secured by an evergreen letter of credit in the amount of $1.9 million, which arosereceived in 2011 as part of a settlement agreement for a large construction, land acquisition and development loan for a residential development project in the Pocono region of Monroe County, and has been included in other assets since 2011.Pennsylvania. The agreement provides for payment to FNCB as real estate building lots are sold. The project was stalled due to a decline in real estate values in this area following the financial crisis of 2008. The agreement provides for payment to FNCB as real estate building lots are sold. To date, no lots have been sold; however, economic development in this market area has recently improved and construction activity related to this project by the developer has increased. Management hasIn 2016, management classified this assetreceivable as substandard due to the length of holding time and will continuetime. In 2019, economic development in this market area has improved. Management continues to monitor this project closely. Alsoclosely and has confirmed that the developer for this project has resumed construction activity, including the completion of substantial infrastructure for the development, and has increased marketing and sales initiatives related to the project. As of September 30, 2019, no single-unit lots have been sold.
There were three residential mortgage loans modified as TDRs during the three months ended September 30, 2019. The modifications included in other non-performing assets at December 31, 2016 was foreclosed equipmenta principal forbearance, capitalization of $260taxes and extension of terms and the loans had an aggregate pre and post-modification balance of $250 thousand which was sold duringand $261 thousand, respectively. For the nine months ended, September 30, 2017, resulting in a net gain2019, four residential mortgage loans were modified as TDRs with an aggregate pre- and post-modification balance of $47$274 thousand that was included in non-interest incomeand $285 thousand, respectively. There were no loans modified as TDRs during the three and nine months ended September 30, 2018. There were no TDRs modified within the consolidated statements of income.
previous 12 months that defaulted during the three and nine months ended September 30, 2019 and 2018. TDRs at September 30, 20172019 and December 31, 20162018 were $10.2$8.1 millionand $4.3$9.2 million, respectively. Accruing and non-accruing TDRs were $9.3 $7.8million and $0.9$0.3 million, respectively at September 30, 20172019 and $4.2$8.5 million and $0.1$0.7 million, respectively at December 31, 2016. There were eight2018. FNCB was not committed to lend additional funds to any loan relationships modifiedclassified as TDRs during the nine months ended a TDR at September 30, 2017, which incorporated a total of fifteen individual loans. There were three loan relationships, comprised of eight commercial real estate loans totaling $5.3 million, and two loan relationships comprised of four commercial and industrial loans totaling $1.8 million that were modified under varying forms of forbearance agreements during the nine months ended September 30, 2017. Additional TDRs included two consumer loans totaling $85 thousand that had their terms extended and delinquent taxes capitalized, as well as one residential real estate loan in the amount of $63 thousand that had its terms extended. The commercial real estate modifications included a principal forbearance agreement for one loan in the amount of $4.0 million and reductions in required monthly principal payments resulting in balloon payments due at maturity for seven loans to two borrowers aggregating $1.2 million. The four commercial and industrial loan modifications involved the delay of required principal and interest payments for predefined time periods.
Approximately $0.8 million in specific reserves to the ALLL were established for TDRs at September 30, 2017, of which $0.6 million represented specific reserves for loans modified during the nine months ended September 30, 2017. In addition, a charge-off in the amount of $0.3 million was recorded as part of the modification of three commercial and industrial loans aggregating $1.8 million to one borrower. All loans modified during 2017 are performing in accordance with their respective modified terms.2019.
The average balance of impaired loans was $11.3 million and $7.0 $12.3million for both the three and nine months ended September 30, 2019 and 2018. For the nine months ended September 30, 20172019 and 2016,2018, impaired loans averaged $12.7 million and $11.4 million, respectively. FNCB recorded $108recognized $97 thousand and $284$302 thousand of interest income on impaired loans for the three and nine months ended September 30, 2017,2019, respectively and $46$106 thousand and $152$310 thousand for the three and nine months ended September 30, 2016.respective periods of 2018.
The following table presents the changes in non-performing loans for thethree and nine months ended September 30, 20172019 and 2016.2018. Loan foreclosures represent recorded investment at time of foreclosure not including the effect of any guarantees:guarantees. There was one residential mortgage loan foreclosed upon during the three and nine months ended September 30, 2019. The loan was 100.0% sold to a third-party investor and had no recorded investment outstanding at time of foreclosure.
Changes in Non-performingNon-Performing Loans
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
Balance, beginning of period | $ | 3,681 | $ | 2,739 | $ | 2,234 | $ | 3,788 | $ | 5,302 | $ | 3,469 | $ | 4,696 | $ | 2,578 | ||||||||||||||||
Loans newly placed on non-accrual | 404 | 1,126 | 3,273 | 3,364 | 1,707 | 2,261 | 4,801 | 5,325 | ||||||||||||||||||||||||
Changes in loans past due 90 days or more and still accruing | - | - | - | - | ||||||||||||||||||||||||||||
Loans transferred to OREO | - | (940 | ) | (80 | ) | (1,177 | ) | |||||||||||||||||||||||||
Loans returned to performing status | (109 | ) | (3 | ) | (180 | ) | (147 | ) | - | - | (27 | ) | - | |||||||||||||||||||
Loan foreclosures | - | - | - | (25 | ) | |||||||||||||||||||||||||||
Loans charged-off | (363 | ) | (171 | ) | (1,104 | ) | (1,991 | ) | (411 | ) | (1,032 | ) | (1,978 | ) | (2,726 | ) | ||||||||||||||||
Loan payments received | (971 | ) | (335 | ) | (1,501 | ) | (1,421 | ) | (479 | ) | (307 | ) | (1,373 | ) | (761 | ) | ||||||||||||||||
Balance, end of period | $ | 2,642 | $ | 2,416 | $ | 2,642 | $ | 2,416 | $ | 6,119 | $ | 4,391 | $ | 6,119 | $ | 4,391 |
The additional interest income that would have been earned on non-accrual and restructured loans had the loans been performing in accordance with their original terms for the three and nine months ended September 30, 20172019 approximated $50$90 thousand and $116$267 thousand, respectively and $48$65 thousand and $175$150 thousand for the three and nine months ended September 30, 2016, respectively.respective period of 2018.
The following table outlinespresents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at September 30, 20172019 and December 31, 2016:2018:
Loan Delinquencies and Non-AccrualNon-Accrual Loans
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Accruing: | ||||||||||||||||
30-59 days | 0.28 | % | 0.37 | % | 0.32 | % | 0.32 | % | ||||||||
60-89 days | 0.18 | % | 0.13 | % | 0.11 | % | 0.05 | % | ||||||||
90+ days | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Non-accrual | 0.35 | % | 0.31 | % | 0.73 | % | 0.56 | % | ||||||||
Total delinquencies | 0.81 | % | 0.81 | % | 1.16 | % | 0.93 | % |
Total delinquencies as a percentagepercent of gross loans were 0.81%1.16% at both September 30, 2017 and 2019 compared to 0.93% at December 31, 2016,2018. The increase in total delinquent loans was primarily due to increases an increase in both non-accrual loans and loans 60-89 days delinquent of $0.4$1.4 million, each, offset by a decreasecoupled with an increase in accruing loans past due 30-5960-89 days. In its evaluation of the ALLL, management considers a variety of qualitative factors including changes in the volume and severity of delinquencies.
Allowance for Loan and Lease Losses
The ALLL represents management’smanagement’s estimate of probable loan losses inherent in the loan portfolio. The ALLL is analyzed in accordance with GAAP and is maintained at a level that is based on management’s evaluation of the adequacy of the ALLL in relation to the risks inherent in the loan portfolio.
As part of its evaluation, management considers qualitative and environmental factors, including, but not limited to:
changes in national, local, and business economic conditions and developments, including the condition of various market segments;
changes in the nature and volume of the loan portfolio;
changes in lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices and results;
changes in the experience, ability and depth of lending management and staff;
changes in the quality of the loan review system and the degree of oversight by the Board of Directors;
changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual loans, TDRs and other loan modifications;
the existence and effect of any concentrations of credit and changes in the level of such concentrations;
the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portfolio; and
analysis of customers’ credit quality, including knowledge of their operating environment and financial condition.
Evaluations are intrinsically subjective, as the results are estimated based on management knowledge and experience and are subject to interpretation and modification as information becomes available or as future events occur. Management monitors the loan portfolio on an ongoing basis with emphasis on weakness in both the real estate market and the economy in general and its effect on repayment. Adjustments to the ALLL are made based on management’smanagement’s assessment of the factors noted above.
For purposes of management’s analysis of the ALLL, all loan relationships with an aggregate balance greater than $100 thousand that are rated substandard and non-accrual, identified as doubtful or loss, and all TDRs are considered impaired and are analyzed individually to determine the amount of impairment. Circumstances such as construction delays, declining real estate values, and the inability of the borrowers to make scheduled payments have resulted in these loan relationships being classified as impaired. FNCB utilizes the fair value of collateral method for collateral-dependent loans and TDRs for which repayment depends on the sale of collateral. For non-collateral-dependent loans and TDRs, FNCB measures impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. With regard to collateral-dependent loans, appraisals are received at least annually to ensure that impairment measurements reflect current market conditions. Should a current appraisal not be available at the time of impairment analysis, other valuation sources including current letters of intent, broker price opinions or executed agreements of sale may be used. Only downward adjustments are made based on these supporting values. Included in all impairment calculations is a cost to sell adjustment of approximately 10%, which is based on typical cost factors, including a 6% broker commission, 1% transfer taxes and 3% various other miscellaneous costs associated with the sales process. Sales costs are periodically reviewed and revised based on actual experience. The ALLL analysis is adjusted for subsequent events that may arise after the end of the reporting period but before the financial reports are filed.
The ALLL equaled $8.9$9.3 million at September 30, 2017, an increase2019, a decrease of $0.5$0.2 million from $8.4$9.5 million at December 31, 2016.2018. The increasedecrease resulted from a provision for loan and lease lossesnet loans charged-off of $486 thousand$1.0 million for the nine months ended September 30, 2017,2019, partially offset by net charge-offs of $43 thousanda $0.8million provision for loan and lease losses for the same time period.
The ALLL consists of both specific and general components. The component of the ALLL that is related to impaired loans that are individually evaluated for impairment, the guidance for which is provided by ASC 310 ““Impairment of a Loan”Loan” (“ASC 310”), was $0.8$0.3 million, or 8.7%3.1%, of the total ALLL at September 30, 2017,2019, compared to $0.3$0.7 million, or 3.6%6.9%, of the total ALLL at December 31, 2016. The increase in reserves for loans individually evaluated for impairment resulted primarily from a reserve established for a large commercial and industrial loan relationship that was transferred to non-accrual and modified as a TDR during the nine months ended September 30, 2017.2018. A general allocation of $8.1$9.0 million was calculated for loans analyzed collectively under ASC 450 ““Contingencies”Contingencies” (“ASC 450”), which represented 91.3%96.9% of the total ALLL of $8.5$9.3 million. Comparatively, at December 31, 2016,2018, the general allocation for loans collectively analyzed for impairment amounted to $8.1$8.9 million, or 96.4%93.1%, of the total ALLL. The increase in general reserves primarily reflected an increase in total loans outstanding. The ratio of the ALLL to total loans at September 30, 20172019 and December 31, 20162018 was 1.17%1.11% and 1.15%1.13%, respectively, based on total loans, net of $756.9net deferred loan costs and unearned income of$836.9 million and $731.8$839.1 million, respectively.
The following table presents an allocation of the ALLL by major loan category and percent of loans in each category to total loans at September 30, 20172019 and December 31, 2016:2018:
Allocation of the ALLL
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||
Percentage | Percentage | Percentage | Percentage | |||||||||||||||||||||||||||||
of Loans | of Loans | of Loans | of Loans | |||||||||||||||||||||||||||||
in Each | in Each | in Each | in Each | |||||||||||||||||||||||||||||
Category | Category | Category | Category | |||||||||||||||||||||||||||||
Allowance | to Total | Allowance | to Total | Allowance | to Total | Allowance | to Total | |||||||||||||||||||||||||
(dollars in thousands) | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | ||||||||||||||||||||||||
Residential real estate | $ | 1,178 | 20.12 | % | $ | 1,171 | 19.79 | % | $ | 1,158 | 19.88 | % | $ | 1,175 | 19.74 | % | ||||||||||||||||
Commercial real estate | 3,303 | 33.53 | % | 3,297 | 33.46 | % | 3,851 | 33.51 | % | 3,107 | 31.46 | % | ||||||||||||||||||||
Construction, land acquisition and development | 277 | 3.54 | % | 268 | 2.52 | % | 226 | 4.72 | % | 188 | 2.49 | % | ||||||||||||||||||||
Commercial and industrial | 2,363 | 19.30 | % | 1,736 | 20.69 | % | 1,991 | 19.59 | % | 2,552 | 18.07 | % | ||||||||||||||||||||
Consumer | 1,433 | 18.32 | % | 1,457 | 17.54 | % | 1,796 | 17.79 | % | 2,051 | 21.17 | % | ||||||||||||||||||||
State and political subdivision | 308 | 5.19 | % | 490 | 6.00 | % | 216 | 4.51 | % | 417 | 7.07 | % | ||||||||||||||||||||
Unallocated | 77 | 0.00 | % | 29 | 0.00 | % | ||||||||||||||||||||||||||
Total | $ | 8,862 | 100.00 | % | $ | 8,419 | 100.00 | % | $ | 9,315 | 100.00 | % | $ | 9,519 | 100.00 | % |
The following table presents an analysis of the ALLL by loan category for the three and nine months ended September 30, 20172019 and 2016:2018:
Reconciliationof the ALLL
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||
(dollars in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||
Balance at beginning of period | $ | 8,469 | $ | 8,559 | $ | 8,419 | $ | 8,790 | $ | 8,945 | $ | 9,459 | $ | 9,519 | $ | 9,034 | ||||||||||||||||
Charge-offs: | ||||||||||||||||||||||||||||||||
Residential real estate | 32 | 37 | 112 | 61 | - | - | 27 | 63 | ||||||||||||||||||||||||
Commercial real estate | 85 | - | 114 | 251 | - | 719 | - | 1,845 | ||||||||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | 18 | - | ||||||||||||||||||||||||
Commercial and industrial | 128 | 18 | 475 | 1,082 | 216 | 5 | 976 | 86 | ||||||||||||||||||||||||
Consumer | 132 | 134 | 438 | 652 | 201 | 313 | 973 | 753 | ||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total charge-offs | 377 | 189 | 1,139 | 2,046 | 417 | 1,037 | 1,994 | 2,747 | ||||||||||||||||||||||||
Recoveries of charged-off loans: | ||||||||||||||||||||||||||||||||
Residential real estate | 16 | 2 | 28 | 4 | 1 | 5 | 7 | 132 | ||||||||||||||||||||||||
Commercial real estate | 38 | 1 | 43 | 4 | - | 39 | 14 | 42 | ||||||||||||||||||||||||
Construction, land acquisition and development | - | - | 421 | 9 | 1 | - | 82 | 30 | ||||||||||||||||||||||||
Commercial and industrial | 125 | 184 | 304 | 396 | 58 | 58 | 265 | 205 | ||||||||||||||||||||||||
Consumer | 48 | 167 | 300 | 475 | 90 | 154 | 592 | 382 | ||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total recoveries | 227 | 354 | 1,096 | 888 | 150 | 256 | 960 | 791 | ||||||||||||||||||||||||
Net charge-offs (recoveries) | 150 | (165 | ) | 43 | 1,158 | |||||||||||||||||||||||||||
Provision (credit) for loan and lease losses | 543 | (234 | ) | 486 | 858 | |||||||||||||||||||||||||||
Net charge-offs | 267 | 781 | 1,034 | 1,956 | ||||||||||||||||||||||||||||
Provision for loan and lease losses | 637 | 1,149 | 830 | 2,749 | ||||||||||||||||||||||||||||
Balance at end of period | $ | 8,862 | $ | 8,490 | $ | 8,862 | $ | 8,490 | $ | 9,315 | $ | 9,827 | $ | 9,315 | $ | 9,827 | ||||||||||||||||
Net charge-offs (recoveries) as a percentage of average loans | 0.02 | % | (0.02 | %) | 0.01 | % | 0.16 | % | ||||||||||||||||||||||||
Net charge-offs as a percentage of average loans | 0.03 | % | 0.09 | % | 0.13 | % | 0.24 | % | ||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of gross loans at period end | 1.17 | % | 1.17 | % | 1.17 | % | 1.17 | % | ||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of gross loans outstanding at period end | 1.11 | % | 1.14 | % | 1.11 | % | 1.14 | % |
Other Real Estate Owned
At September 30, 2017, OREO consisted of 9four properties with an aggregate carrying value of $1.1$0.4 million a decreaseat September 30, 2019 and six properties with an aggregate carrying value of $0.9 million from $2.0 million at December 31, 2016. FNCB 2018. There were two properties with an aggregate fair value less cost to sell of $256 thousand that wereforeclosed upon twoduring the nine months ended September 30, 2019. The properties foreclosed upon were the collateral supporting investor-owned residential real estatemortgage loans. The agreement with the investor requires FNCB to take title to the property upon foreclosure and FNCB is responsible for the property liquidation on behalf of the investor after foreclosure. There were four OREO properties, with aan aggregate carrying value of $125$749 thousand, sold during the nine months ended September 30, 2017.2019. FNCB realized a net gain of $20 thousand upon the sales, which is included in non-interest income for the nine months ended September 30, 2019. There was one sale and one partial sale ofwere no properties foreclosed upon during the nine months ended September 30, 2018. There were two OREO properties, with an aggregatea carrying value of $763$439 thousand, that were sold during the nine months ended September 30, 2017, which resulted in a net gain of $57 thousand. During the nine months ended September 30, 2016, two properties with a carrying value of $950 thousand were foreclosed upon, and there were three sales and one partial sale of properties with an aggregate carrying value of $1.9 million,2018, which resulted in a net gain on the sales of $29$31 thousand.
The expenses related to maintaining OREO, not including adjustments to property values subsequent to foreclosure, and net of any income from operation of the properties, amounted to $38$48 thousand and $126$113 thousand for the three months and nine months ended September 30, 2017,2019, respectively, compared to $64$19 thousand and $166$102 thousand respectively, for the samerespective periods in 2016.of 2018.
FNCB actively markets OREO properties for sale through a variety of channels including internal marketing and the use of outside brokers/realtors. The carrying value of OREO is generally calculated at an amount not greater than 90% of the most recent fair market appraised value unless specific conditions warrant an exception. A 10% factor is generally used to estimate costs to sell, which is based on typical cost factors, such as 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. TheThis fair value is updated on an annual basis or more frequently if new valuation information is available. Further deteriorationDeterioration in the real estate market could result in additional losses on these properties. FNCB incurred valuation adjustments of $82 thousand and $322 thousand forFor the three and nine months ended September 30, 2017, $3072019, FNCB recorded valuation adjustments of $14 thousand. FNCB recorded valuation adjustments of $72 thousand of which is included in expense of other real estate owned in the consolidated statements of income. A $15and $89 thousand valuation adjustment duringrelated to OREO properties for the three and nine months ended September 30, 2017 was related to an investor loan, and accordingly reduced the liability owed to the investor. Valuation adjustments on OREO properties totaled $31 thousand and $169 thousand for the three and nine months ended September 30, 2016.2018.
The following table presents the activity in OREO for the three and nine months ended September 30, 20172019 and 2016:2018:
Activity in OREO
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
Balance, beginning of period | $ | 1,183 | $ | 1,628 | $ | 2,048 | $ | 3,154 | $ | 560 | $ | 787 | $ | 919 | $ | 1,023 | ||||||||||||||||
Property foreclosures | - | 713 | 125 | 950 | 204 | - | 256 | 220 | ||||||||||||||||||||||||
Valuation adjustments | (82 | ) | (31 | ) | (322 | ) | (169 | ) | (14 | ) | (72 | ) | (14 | ) | (89 | ) | ||||||||||||||||
Carrying value of OREO sold | (13 | ) | (245 | ) | (763 | ) | (1,870 | ) | (338 | ) | - | (749 | ) | (439 | ) | |||||||||||||||||
Balance, end of period | $ | 1,088 | $ | 2,065 | $ | 1,088 | $ | 2,065 | $ | 412 | $ | 715 | $ | 412 | $ | 715 |
The following table presents a distribution of OREO at September 30, 20172019 and December 31, 2016:2018:
Distribution of OREO
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | 2019 | 2018 | ||||||||||||
Land / lots | $ | 524 | $ | 641 | $ | 85 | $ | 436 | ||||||||
Commercial real estate | 427 | 1,380 | 72 | 438 | ||||||||||||
Residential real estate | 137 | 27 | 255 | 45 | ||||||||||||
Total other real estate owned | $ | 1,088 | $ | 2,048 | $ | 412 | $ | 919 |
Liabilities
Total liabilities, which consist primarily of total deposits and borrowed funds, were$1.0601.065 billion at September 30, 2017,2019, a decrease of $45.6$75.9 million, or 4.1%6.6%, from $1.105$1.141 billion at December 31, 2016.2018. The decrease was primarily attributable to a $31.9decrease in total deposits, partially offset by an increase in borrowed funds. Total deposits decreased $131.6 million, outflow ofor 12.0%, to $964.1 million at September 30, 2019 from $1.096 billion at December 31, 2018. Specifically, interest-bearing deposits coupled with a reduction of $13.2decreased $154.0 million, in Federal Home Loan Bank of Pittsburgh advances.or 16.4%, to $785.0 million at September 30, 2019 from $939.0 million at December 31, 2018, while non-interest-bearing demand deposits increased$22.4 million, or 14.3%, to $179.0 million at September 30, 2019 from $156.6 million at December 31, 2018. The decrease in total deposits was due toprimarily reflected cyclical net outflows of municipal deposits, coupled with a $20.7decrease in the utilization of brokered deposits as a wholesale source of funding. Conversely, borrowed funds increased $55.5 million, or 2.5%162.2%, decrease in interest-bearing deposits to $820.8 $89.8million at September 30, 20172019 from $841.4$34.2 million at December 31, 2016, along with an $11.3 million, or 6.5%, reduction in non-interest-bearing demand2018. Management regularly monitors wholesale funding sources taking into consideration the cost of funds, diversification between funding sources and asset/liability management strategies. FNCB utilizes brokered deposits, including one-way purchases through the Promontory Interfinancial Network, deposits acquired through a national listing service, as well as overnight and term advances through the FHLB of Pittsburgh as wholesale sources of funds to $162.4 million at September 30, 2017 from $173.7 million at December 31, 2016. The decrease in interest-bearing deposits primarily reflected the anticipated exit of short-term funds related to the sale of a municipal utility deposited during the fourth quarter of 2016. The decrease in non-interest bearing deposits was concentrated in business checking deposits.supplement its deposit gathering initiatives.
On September 1, 2017, FNCB accelerated a partial principal repayment in the amount of $5.0 million on the subordinated notes (“Notes”). This principal repayment was originally due and payable on September 1, 2018. By accelerating the principal repayment, FNCB is expected to save $225 thousand in interest expense related to the Notes.
Equity
Total shareholders’shareholders’ equityincreased $7.1$35.3 million, or 7.9%36.4%, to $97.5$132.6 million at September 30, 20172019 from $90.4$97.2 million at December 31, 2016.2018. The improvement in capital resulted primarily from the completion of a public offering of FNCB's common stock in the first quarter of 2019, which resulted in a net increase to capital after offering expenses of $21.3 million. Also factoring into the capital improvement resulted fromwas net income for the first nine months ended September 30, 2019of 2017 of $6.3$7.6 million coupled withand a $1.7$9.1 million increasein accumulated other comprehensive income which resulted fromrelated to appreciation in the fair value of available-for-sale debt securities, net of deferred taxes. These improvements were partially offset by dividends declared and paid for the tax impactnine months ended September 30, 2019 of the appreciation.$3.0 million. Book value per common share was $5.82 $6.57 at September 30, 2019, an increase of $0.79,or 13.7%, compared to $5.78 at December 31, 2018.
FNCB's total regulatory capital increased$25.9 million to $143.1 millionat September 30, 2017, an increase of $0.39 per share, or 7.2%, compared to $5.432019 from $117.2 million at December 31, 2016.2018. FNCB's total risk-based capital and Tier 1 leverage ratios improved to 15.72% and 11.27%, respectively at September 30, 2019 from 12.69% and 8.50%, respectively, at December 31, 2018. FNCB's and the Bank's risk-based capital ratios exceeded the minimum regulatory capital ratios required for well capitalized under prompt corrective action regulations. Based on the most recent notification from its primary regulator, the Bank was considered well capitalized at September 30, 2019 and December 31, 2018. There are not conditions or events since that notification that management believes would have changed this capital designation.
Liquidity
The term liquidity refers to the ability to generate sufficientsufficient amounts of cash to meet cash flow needs. Liquidity is required to fulfill the borrowing needs of FNCB’s credit customers and the withdrawal and maturity requirements of its deposit customers, as well as to meet other financial commitments. FNCB’s liquidity position is impacted by several factors, which include, among others, loan origination volumes, loan and investment maturity structure and cash flows, deposit demand and certificate oftime deposit maturity structure and retention. FNCB has liquidity and contingent funding policies in place that are designed with controls in place to provide advanced detection of potentially significant funding shortfalls, establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate a potential liquidity crisis. Management monitors FNCB’s liquidity position and fluctuations daily, forecasts future liquidity needs, performs periodic stress tests on its liquidity levels and develops strategies to ensure adequate liquidity at all times.
The statements of cash flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and interest-bearing deposits in other banks, which comprise cash and cash equivalents, are FNCB’s most liquid assets. At September 30, 2017,2019, cash and cash equivalents totaled $43.8$37.5 million, a decreasean increase of $68.6$1.0 million compared to $112.4$36.5 million at December 31, 2016. Net funds2018, as net cash provided by operating and investing activities for the nine months ended September 30, 2019 was almost entirely offset by cash used in financing activities were $51.2during that same time frame. Operating activities for the nine months ended September 30, 2019 provided net cash of $9.6million. Net cash provided by FNCB's investing activities was $49.2 million for the nine months ended September 30, 2017, largely representing2019, which resulted primarily from sales and repayments of available-for-sale debt securities of $108.8 million, partially offset by cash used for purchases of available for sale debt securities of $55.8 million. Financing activitiesused $57.7 million in net cash for the nine months ended September 30, 2019, which resulted primarily from a decrease in deposits from customers of $31.9$131.6 million, net repayment of FHLB term and overnight borrowings of $13.2 million, and a principal reduction on subordinated debentures of $5.0 million and cash dividends paid of $3.0 million. Investing activities used $24.9Partially offsetting these cash outflows was proceeds from the issuance of common shares of $21.3 million inand net cash for the nine months ended September 30, 2017, driven primarily by a net increase in loans to customersproceeds from FHLB term and overnight advances of $30.1 million. Net cash provided by operating activities totaled $7.4 million.$60.5 million.
Interest Rate Risk
Interest Rate Sensitivity
Market risk is the risk to earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. FNCB’s exposure to market risk is primarily interest rate risk associated with our lending, investing and deposit gathering activities, all of which are other than trading. Changes in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. In addition, variations in interest rates affect the underlying economic value of our assets, liabilities and off-balance sheet items.
Asset and Liability Management
FNCB manages these objectives through its Asset and Liability Management Committee (“ALCO”) and its Rate and Liquidity and Investment Committees, which consist of certain members of management and certain members of the finance unit. Members of the committees meet regularly to develop balance sheet strategies affecting the future level of net interest income, liquidity and capital. The major objectives of ALCO are to:
● | manage exposure to changes in the interest rate environment by limiting the changes in net interest margin to an acceptable level within a reasonable range of interest rates; |
● | ensure adequate liquidity and funding; |
● | maintain a strong capital base; and |
● | maximize net interest income opportunities. |
ALCO monitors FNCB’s exposure to changes in net interest income over both a one-year planning horizon and a longer-term strategic horizon. ALCO uses net interest income simulations and economic value of equity (“EVE”) simulations as the primary tools in measuring and managing FNCB’s position and considers balance sheet forecasts, ourFNCB's liquidity position, the economic environment, anticipated direction of interest rates and FNCB’s earnings sensitivity to changes in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable negative changes in net interest income. Furthermore, as part of its ongoing monitoring, ALCO has been enhanced to require periodicrequires quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques.
Earnings at Risk and Economic Value at Risk Simulations
Earnings at Risk
Earnings-at-risk simulation measures the change in net interest income and net income under various interest rate scenarios. Specifically, given the current market rates, ALCO looks at “earnings at risk” to determine anticipated changes in net interest income from a base case scenario with scenarios of +200, +400, and -100-200 basis points for simulation purposes. The simulation takes into consideration that not all assets and liabilities re-price equally and simultaneously with market rates (i.e., savings rate).
Economic Value at Risk
While earnings-at-risk simulation measures the short-term risk in the balance sheet, economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from FNCB’s existing assets and liabilities. ALCO examines this ratio regularly, and given the current rate environment, has utilized rate shocks of +200, +400, and -100-200 basis points for simulation purposes. Management recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.
While ALCO regularly performs a wide variety of simulations under various strategic balance sheet and treasury yield curve scenarios, the following results reflect FNCB’s sensitivity over the subsequent twelve months based on the following assumptions:
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The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points, +200 basis points, and -100 basis points on net interest income and the change in economic value over a one-year time horizon from the September 30, 20172019 levels:
Rates +200 | Rates +400 | Rates -100 | ||||||||||||||||||||||
Simulation Results | Policy Limit | Simulation Results | Policy Limit | Simulation Results | Policy Limit | |||||||||||||||||||
Earnings at risk: | ||||||||||||||||||||||||
Percent change in net interest income | (0.8% | ) | (10.0% | ) | (3.5% | ) | (20.0% | ) | (4.1% | ) | (5.0% | ) | ||||||||||||
Economic value at risk: | ||||||||||||||||||||||||
Percent change in economic value of equity | (3.3% | ) | (20.0% | ) | (7.5% | ) | (35.0% | ) | (7.4% | ) | (10.0% | ) |
Rates +200 | Rates +400 | Rates -100 | ||||||||||||||||||||||
Simulation Results | Policy Limit | Simulation Results | Policy Limit | Simulation Results | Policy Limit | |||||||||||||||||||
Earnings at risk: | ||||||||||||||||||||||||
Percent change in net interest income | (3.6 | )% | (12.5 | )% | (7.7 | )% | (20.0 | )% | 1.3 | % | (10.0 | )% | ||||||||||||
Economic value at risk: | ||||||||||||||||||||||||
Percent change in economic value of equity | 7.7 | % | (20.0 | )% | 11.0 | % | (35.0 | )% | (10.0 | )% | (10.0 | )% |
Model results at September 30, 2019 indicated that FNCB was liability rate sensitive at September 30, 2017, as a greater volume of interest-bearing liabilities than interest-earning assets will mature or reprice withinover a one-year time frame, duehorizon moving to a significant amount of non-maturity, interest-bearing deposit balances atan asset sensitive position in approximately months 13 though 15, and then continuing in an asset-sensitive position for the endremaining periods of the period. Accordingly,model. The shift from liability sensitivity to asset sensitivity has continued to shorten. Model results as of June 30, 2019 indicated the shift from liability sensitivity to asset sensitivity would occur approximately in months 15-18, while model results at September 30, 2017 indicate thatas of March 31, 2019 showed the shift in months 18-24. During 2019, management took actions designed to shorten FNCB's liability sensitive position including reinvesting$40.3million in proceeds from the sale of fixed-rate investments into floating-rate investments and converting $38.7 million in overnight FHLB advances into term borrowings with maturities of 9 and 24 months. Under the model, FNCB’s net interest income and economic value of equity areis expected to decrease 0.8% and 3.3%, respectively,3.6% under a +200-basis point interest rate shock. DueAdditionally, model results indicated that FNCB's economic value of equity is expected to significant earning asset growthincrease 7.7%under a parallel shift in interest rates of +200 basis points. Under a -100-basis point interest rate shock, model results indicated that FNCB's net interest income would increase 1.3%, while the economic value of equity would decrease 10.0%, respectively. Management does not believe that the modeled decrease in the third quartereconomic value of 2017,equity of 10.0%, which is equal to the results of the simulation modelcurrent policy limit, poses any undue interest rate risk at September 30, 2017 improved in comparison to the2019. Comparatively, model results at June 30, 2017 which2019 indicated net interest income would be expected to decrease 5.0% and economic value of equity werewould be expected to decrease 2.8% and 4.7%, respectively, increase 0.6%given a +200-basis point rate shock. Conversely, given a -100 basis point rate shock at June 30, 2019, net interest income would be expected to increase 1.6% and the economic value of equity would decrease 5.2%.
This analysis does not represent a forecast for FNCB and should not be relied upon as being indicative of expected operating results. These simulations are based on numerous assumptions:assumptions, including but not limited to: the nature and timing of interest rate levels, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacements of asset and liability cash flows, and other factors. While assumptions reflect current economic and local market conditions, FNCB cannot make any assurances as to the predictive nature of these assumptions, including changes in interest rates, customer preferences, competition and liquidity needs, or what actions ALCO might take in responding to these changes.
As previously mentioned, as part of its ongoingongoing monitoring, ALCO requires periodicquarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques. As part of its quarterly review, management compared tax-equivalent net interest income recorded for the three months ended September 30, 20172019 with tax-equivalent net interest income that was projected for the same three-month period. The variance between actual and projected tax-equivalent net interest income for the three-month period ended September 30, 20172019 was $207$19 thousand, or 2.3%0.2%. Although the variance was deemed immaterial, ALCO performs a detailed rate/volume analysis between actual and projected results in order to continue to improve the accuracy of itits simulation models.
Off-Balance Sheet Arrangements
In the normalordinary course of operations, FNCB engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions may be used for general corporate purposes or for customer needs. Corporate purpose transactions would be used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding.
For the three-three and nine-month periodsnine months ended September 30, 2017,2019, FNCB did not engage in any off-balance sheet transactions that would have or would be reasonably likely to have a material effect on its consolidated financial condition.
Item 3 — Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in FNCB’s exposure to market risk during the first nine months of 2017.ended September 30, 2019. For discussion of FNCB’s exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in FNCB’s Form 10-K for the year ended December 31, 2016.2018.
Item 4 — Controls and Procedures
FNCB’sFNCB’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of FNCB’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, FNCB’s Chief Executive Officer and Chief Financial Officer concluded FNCB’s disclosure controls and procedures were effective as of September 30, 2017.2019.
There were no changes made to FNCB’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, FNCB’s internal control over financial reporting.
On May 24, 2012, a putative shareholder filed a complaint in the Court of Common Pleas for Lackawanna County (“Shareholder Derivative Suit”) against certain present and former directors and officers of FNCB (the “Individual Defendants”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste, and unjust enrichment. FNCB was named as a nominal defendant. On February 4, 2014, the Court issued a Final Order and Judgment for the matter granting approval of a Stipulation of Settlement (the “Settlement”) and dismissing all claims against FNCB and the Individual Defendants. As part of the Settlement, without admitting any fault, wrongdoing or liability, the Individual Defendants agreed to settle the derivative litigation for $5.0 million. The $5.0 million Settlement payment was made to FNCB on March 28, 2014. The Individual Defendants reserved their rights to indemnification under FNCB’sFNCB’s Articles of Incorporation and Bylaws, resolutions adopted by the Board, the Pennsylvania Business Corporation Law and any and all rights they have against FNCB’s and the Bank’s insurance carriers. In addition, in conjunction with the Settlement, FNCB accrued $2.5 million related to fees and costs of the plaintiff’s attorneys, which was included in non-interest expense in the consolidated statements of income for the year ended December 31, 2013. On April 1, 2014, FNCB paid the $2.5 million related to fees and costs of the plaintiff’s attorneys and partial indemnification of the Individual Defendants in the amount of $2.5 million. OnCommencing on July 1, 2017, FNCB continued to makemade partial indemnificationindemnifications to the Individual Defendants by commencingthrough monthly principal payments, made on behalf of the Individual Defendants, of $25,000 plus accrued interest due to First Northern Bank and Trust Co. As of September 30, 2017,On April 11, 2018, FNCB indemnified the Individual Defendants by paying in full the $2.5 million, plus accrued interest remains accrued in other liabilities related to the potential indemnification of the Individual Defendants.First Northern Bank & Trust Co.
On September 5, 2012, Fidelity and Deposit Company of Maryland (“F&D”) filed an action against FNCB and the Bank, as well as several current and former officers and directors of FNCB, in the United States District Court for the Middle District of Pennsylvania. F&D has asserted a claim for the rescission of a directors’directors’ and officers’ insurance policy and a bond that it had issued to FNCB. On November 9, 2012, FNCB and the Bank answered the claim and asserted counterclaims for the losses and expenses already incurred by FNCB and the Bank. FNCB and the other defendants are defendingdefended the claims and have opposed F&D’s requested relief by way of counterclaims, breaches of contract and bad faith claims against F&D for its failure to fulfill its obligations tocounterclaims. On December 21, 2018, FNCB, and the Bank underand F&D resolved the insurance policy. Discovery is complete anddispute by entering into a mutual release of all claims. FNCB recognized a gain of $6.0 million after expenses in the parties have exchanged expert reports. Dispositive motions have been submitted by the parties and the Court heard oral arguments on the motions on August 9, 2017. At this time, FNCB cannot reasonably determine the outcomefourth quarter of potential range of loss, if any,2018 in connection with this matter.insurance recovery.
On February 16, 2017, FNCB and the Bank entered into a Class Action Settlement Agreement and Release (the “Settlement Agreement”) in the matters filed in the Court of Common Pleas of Lackawanna County to Steven Antonik, Individually, and as Administrator of the Estate of Linda Kluska, William R. Howells and Louise A. Howells, Summer Benjamin, and Joshua Silfee, on behalf of themselves and all other similarly situated vs. First National Community Bancorp, Inc. and First National Community Bank, Civil Action No. 2013-CV-4438 and Charles Saxe, III, Individually and on behalf of all others similarly situated vs. First National Community Bank No. 2013-CV-5071 (collectively, the “Actions”). By entering into this Settlement Agreement, the parties to the Actions have resolved the claims made in the complaints to their mutual satisfaction. FNCB has not admitted to the validity of any claims or allegations and denies any liability in the claims made and the Plaintiffs have not admitted that any claims or allegations lack merit or foundation. Under the terms of the Settlement Agreement, the parties have agreed to the following: 1) FNCB is to pay the Plaintiffs’ class members the aggregate sum of Seven Hundred Fifty Thousand Dollars ($750,000) (an amount which FNCB recorded as a liability and corresponding expense in its 2015 operating results); 2) Plaintiffs shall release all claims against FNCB related to the Actions; 3) FNCB shall move to vacate or satisfy any judgments against any class members arising from the vehicle loans that are the subject of the Actions; and 4) FNCB shall waive the deficiency balance of each class member and remove the trade lines on each class members’ credit report associated with the subject vehicle loans that are at issue in the Actions for Experian, Equifax, and Transunion. The Settlement Agreement provides for an Incentive Award for the representative Plaintiffs and an award to Plaintiffs’ counsel of attorney’s fees and reimbursement of expenses in connection with their roles in these Actions, subject to Court approval. The Settlement Agreement was approved by Court Order on May 31, 2017. On March 2, 2017 FNCB paid the Settlement Administrator $750,000 pursuant to the terms and conditions of the Settlement Agreement. Additionally, in association with the subject vehicle loans, FNCB has completed the removal of trade lines on each class members' credit report and has substantially completed satisfying judgments, where applicable, in favor of class members. As previously mentioned above and in connection with the primary terms of the tentative settlement agreement entered by Order of Court on December 17, 2015, FNCB recorded a liability and corresponding expense in the amount of Seven Hundred Fifty Thousand ($750,000), which was included in FNCB’s 2015 operating results.
FNCB has been subject to tax audits,, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims, workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of FNCB.
There have been no changes in the status of the other litigation, if any, disclosed in FNCB’s Annual Report on Form 10-K for the year ended December 31, 2018.
Management of FNCB does not believe there have been any material changes in the risk factors that were previously disclosed in FNCB’s Form 10-K for the year ending December 31, 2016.2018.
Item 2 – — Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3 –- Defaults upon Senior Securities.
None.
Item 4 — Mine Safety Disclosures.
Not applicable.
None.
Item 4 – Mine Safety Disclosures.
Not applicable.
Item 5 – Other Information.
None.
The following exhibits are filed or furnished herewith or incorporated by reference.
EXHIBIT | |
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EXHIBIT 31.2* | |
EXHIBIT 32.1** | Section 1350 Certification —Chief Executive Officer and Chief Financial Officer |
EXHIBIT 101.INS | XBRL INSTANCE DOCUMENT |
EXHIBIT 101.SCH | XBRL TAXONOMY EXTENSION SCHEMA |
EXHIBIT 101.CAL | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
EXHIBIT 101.DEF | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
EXHIBIT 101.LAB | XBRL TAXONOMY EXTENSION LABEL LINKBASE |
EXHIBIT 101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
* | Filed herewith |
** | Furnished herewith |
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.
Registrant: FNCB BANCORP, INC.
Date: November | By: | /s/ Gerard A. Champi |
Gerard A. Champi | ||
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Date: November | By: | /s/ James M. Bone, Jr. |
James M. Bone, Jr., CPA | ||
Executive Vice President and Chief Financial Officer | ||
Principal Financial Officer | ||
Date: November | By: | /s/ Stephanie A. Westington |
Stephanie A. Westington, CPA | ||
Senior Vice President and Controller | ||
Principal Accounting Officer | ||
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