FNCB Bancorp, Inc. - Quarter Report: 2019 September (Form 10-Q)

 

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

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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 ended September 30, 2019

 

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. 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’s telephone number, including area code 

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 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 filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		Smaller reporting company ☒
		Emerging growth company ☐

 

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). YES ☐ NO ☒

 

 

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 20,170,532 shares as of November 5, 2019

 

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		September 30,				December 31,
(in thousands, except share data)		2019				2018
Assets
Cash and cash equivalents:
Cash and due from banks		$	30,900			$	26,673
Interest-bearing deposits in other banks			6,611				9,808
Total cash and cash equivalents			37,511				36,481
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			1,140				820
Loans, net of allowance for loan and lease losses of $9,315 and $9,519			827,562				829,581
Bank premises and equipment, net			17,274				14,425
Accrued interest receivable			3,038				3,614
Bank-owned life insurance			31,104				31,015
Other real estate owned			412				919
Net deferred tax assets			6,691				10,693
Other assets			12,676				10,138
Total assets		$	1,197,190			$	1,237,732
Liabilities
Deposits:
Demand (non-interest-bearing)		$	179,025			$	156,600
Interest-bearing			785,035				939,029
Total deposits			964,060				1,095,629
Borrowed funds:
Federal Home Loan Bank of Pittsburgh advances			79,458				18,930
Subordinated debentures			-				5,000
Junior subordinated debentures			10,310				10,310
Total borrowed funds			89,768				34,240
Accrued interest payable			401				338
Other liabilities			10,394				10,306
Total liabilities		$	1,064,623			$	1,140,513
Shareholders' equity
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			81,058				63,547
Retained earnings			21,733				17,186
Accumulated other comprehensive income (loss)			4,565				(4,540	)
Total shareholders' equity			132,567				97,219
Total liabilities and shareholders’ equity		$	1,197,190			$	1,237,732

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		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands, except share data)		2019				2018				2019				2018
Interest income
Interest and fees on loans		$	9,488			$	9,501			$	28,313			$	26,820
Interest and dividends on securities:
U.S. government agencies			924				899				2,723				2,675
State and political subdivisions, tax free			37				37				112				95
State and political subdivisions, taxable			713				1,028				2,545				3,079
Other securities			314				211				729				646
Total interest and dividends on securities			1,988				2,175				6,109				6,495
Interest on interest-bearing deposits in other banks			30				17				155				52
Total interest income			11,506				11,693				34,577				33,367
Interest expense
Interest on deposits			1,901				1,559				6,283				3,760
Interest on borrowed funds:
Interest on Federal Home Loan Bank of Pittsburgh advances			448				715				988				1,774
Interest on subordinated debentures			-				58				24				171
Interest on junior subordinated debentures			106				106				331				292
Total interest on borrowed funds			554				879				1,343				2,237
Total interest expense			2,455				2,438				7,626				5,997
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			797				711				2,203				2,160
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			69				71				198				171
Net gain on the sale of SBA guaranteed loans			-				-				-				322
Net gain on the sale of other real estate owned			11				-				20				31
Loan-related fees			80				85				231				245
Income from bank-owned life insurance			134				141				394				413
Merchant services revenue			142				135				391				365
Other			214				185				754				699
Total non-interest income			1,831				1,320				4,924				4,368
Non-interest expense
Salaries and employee benefits			3,911				3,581				11,634				10,732
Occupancy expense			460				500				1,454				1,629
Equipment expense			332				299				968				936
Advertising expense			228				193				579				519
Data processing expense			742				745				2,312				2,040
Regulatory assessments			21				251				265				648
Bank shares tax			205				278				760				767
Expense of other real estate owned			62				91				127				191
Professional fees			189				241				724				733
Insurance expense			128				130				374				398
Directors fees			236				85				405				256
Other losses			16				28				26				155
Other operating expenses			799				766				2,248				2,382
Total non-interest expense			7,329				7,188				21,876				21,386
Income before income tax expense			2,916				2,238				9,169				7,603
Income tax expense			513				388				1,582				1,322
Net income		$	2,403			$	1,850			$	7,587			$	6,281
Earnings per share
Basic		$	0.12			$	0.11			$	0.39			$	0.37
Diluted		$	0.12			$	0.11			$	0.39			$	0.37
Cash dividends declared per common share		$	0.05			$	0.04			$	0.15			$	0.12
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic			20,168,529				16,818,625				19,678,031				16,791,815
Diluted			20,172,282				16,838,547				19,683,522				16,813,948

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		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)		2019				2018				2019				2018
Net income		$	2,403			$	1,850			$	7,587			$	6,281
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale debt securities			1,964				(2,302	)			12,227				(9,118	)
Taxes			(412	)			483				(2,567	)			1,914
Net of tax amount			1,552				(1,819	)			9,660				(7,204	)
Reclassification adjustment for (gains) losses included in net income			(379	)			-				(702	)			4
Taxes			79				-				147				(1	)
Net of tax amount			(300	)			-				(555	)			3
Total other comprehensive income (loss)			1,252				(1,819	)			9,105				(7,201	)
Comprehensive income (loss)		$	3,655			$	31			$	16,692			$	(920	)

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(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

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		Nine Months Ended September 30,
(in thousands)		2019				2018
Cash flows from operating activities:
Net income		$	7,587			$	6,281
Adjustments to reconcile net income to net cash provided by operating activities:
Investment securities amortization, net			613				607
Equity in trust			(10	)			(9	)
Depreciation and amortization			2,294				2,126
Valuation adjustment for loan servicing rights			6				-
Stock-based compensation expense			346				215
Provision for loan and lease losses			830				2,749
Valuation adjustment for off-balance sheet commitments			245				(111	)
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			(198	)			(171	)
Net gain on the sale of SBA guaranteed loans			-				(322	)
Net gain on the sale of other real estate owned			(20	)			(31	)
Valuation adjustment of other real estate owned			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			(394	)			(413	)
Proceeds from the sale of mortgage loans held for sale			7,271				7,904
Funds used to originate mortgage loans held for sale			(7,393	)			(7,576	)
Decrease in net deferred tax assets			1,582				1,316
Decrease (increase) in accrued interest receivable			576				(827	)
(Increase) decrease in prepaid expenses and other assets			(2,506	)			1,311
Increase in accrued interest payable			63				77
Decrease in director indemnification liability			-				(2,553	)
Decrease in accrued expenses and other liabilities			(491	)			(177	)
Total adjustments			1,985				4,286
Net cash provided by operating activities			9,572				10,567
Cash flows from investing activities:
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			(29	)			(102,370	)
Proceeds from the sale of SBA guaranteed loans			-				6,032
Proceeds from the sale of other real estate owned			769				470
Proceeds received from bank-owned life insurance			419				-
Purchases of bank premises and equipment			(3,879	)			(4,818	)
Net cash provided by (used in) investing activities			49,189				(110,302	)
Cash flows from financing activities:
Net (decrease) increase in deposits			(131,569	)			92,673
Net proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight			8,300				-
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term			62,713				73,929
Repayment of Federal Home Loan Bank of Pittsburgh advances - term			(10,485	)			(72,407	)
Principal reduction on subordinated debentures			(5,000	)			-
Proceeds from issuance of common shares, net of discount			21,331				107
Cash dividends paid			(3,021	)			(2,016	)
Net cash (used in) provided by financing activities			(57,731	)			92,286
Net increase (decrease) in cash and cash equivalents			1,030				(7,449	)
Cash and cash equivalents at beginning of period			36,481				37,746
Cash and cash equivalents at end of period		$	37,511			$	30,297
Supplemental cash flow information
Cash paid during the period for:
Interest		$	7,563			$	5,920
Income taxes			-				23
Other transactions:
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				-

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Note 1.   Basis of Presentation

 

The consolidated financial statements of FNCB are comprised of the accounts of FNCB Bancorp, Inc., and its wholly owned subsidiary, FNCB Bank (the “Bank”), as well as the Bank’s wholly 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-Q and Article 10-01 of Regulation 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, 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-K as of and for the year ended December 31, 2018.

 

Note 2.   New Authoritative Accounting Guidance

 

Accounting Guidance to be Adopted in Future Periods

 

Accounting 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 was originally effective for public business entities that are registered with the U.S. Securities and Exchange Commission (“SEC”) under 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, 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 understands the provisions of ASU 2016-13 and is currently in the process of implementing the new guidance, which includes, but is not limited to: (1) identifying segments and sub-segments within the loan portfolio that have similar risk characteristics; (2) determining the appropriate 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 (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 its operating results and/or financial position, including assessing any potential impact on its capital.

 

Refer to Note 2 to FNCB’s consolidated financial statements included in the 2018 Annual Report on Form 10-K for a discussion of additional accounting guidance applicable to FNCB that will be adopted in future periods.

 

 

Note 3. Securities

 

Debt Securities

 

The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s available-for-sale debt securities at September 30, 2019 and December 31, 2018:

 

 

 

 

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’ equity at September 30, 2019.

 

At September 30, 2019 and December 31, 2018, securities with a carrying amount of $233.3 million and $286.4 million, respectively, were pledged as collateral to secure public deposits and for other purposes.

 

 

The following table presents the maturity information of FNCB’s available-for-sale debt securities at September 30, 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.

 

 

Gross proceeds from the sale of available-for-sale debt securities were $40.9 million and $102.3 million for the three and nine months ended September 30, 2019, respectively. For the three months ended September 30, 2019 gross gains and losses realized upon the sales were $383 thousand and $4 thousand, respectively. Gross gains and losses realized upon the sales for the nine months ended September 30, 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, 2018.  Gross proceeds from the sale of available-for-sale debt securities were $4.6 million for the nine months ended September 30, 2018, with gross losses of $4 thousand realized upon the sales. There were no gross gains realized upon the sales for the nine months ended September 30, 2018.  

 

The following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time the securities have been in an unrealized loss position.

 

 

 

 

 

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 10 securities in an unrealized loss position at September 30, 2019, including six securities issued by a U.S. government or government-sponsored agency, two obligations of state and political subdivisions, one asset-backed security and one corporate debt security. Management performed a review of all securities in an unrealized loss position as of September 30, 2019 and determined that changes in the fair values of the securities were consistent with movements 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, 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 securities, management concluded that the individual unrealized losses were temporary and OTTI did not exist at September 30, 2019.

 

Equity 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.

 

 

 

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.

 

 

Management noted no indicators of impairment for the Federal Home Loan Bank of Pittsburgh or Atlantic Community Banker’s Bank stock at September 30, 2019 and December 31, 2018.

 

Equity Securities without Readily Determinable Fair Values

 

FNCB owns a $1.7 million 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 the fair value of the investment is less than its carrying value. The $1.7 million investment is included in other assets in the consolidated statements of financial condition at September 30, 2019 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, 2019, which indicated that the investment was not impaired.  Management determined that no adjustment for impairment was required at September 30, 2019.

 

Note 4. Loans

 

The following table summarizes loans receivable, net, by category at September 30, 2019 and December 31, 2018:

 

 

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 6, “Related Party Transactions” to these consolidated financial statements.

 

FNCB originates 1-4 family mortgage loans for sale in the secondary market. During the three months and nine months ended September 30, 2019, one-to four-family mortgages sold on the secondary market were $2.9 million and $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 $2.7 million and $7.7 million, respectively. Net gains on the sale of residential mortgage loans for the three and nine months ended September 30, 2019 were $69 thousand and $198 thousand, respectively and $71 thousand and $171 thousand, respectively, for the comparable periods of 2018. FNCB retains servicing rights on mortgages sold on the secondary market. At September 30, 2019 and December 31, 2018, there were $1.1 million and $0.8 million in 1-4 family residential mortgage loans held for sale, respectively.

 

 

During the nine months ended September 30, 2018, FNCB sold the guaranteed principal balance of loans that were guaranteed by the Small Business Administration (“SBA”) totaling $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 of $0.3 million included in non-interest income. FNCB retained the servicing rights on these loans. There were no sales of SBA-guaranteed loans during the three and nine months ended September 30, 2019. The unpaid principal balance of loans serviced for others, including residential mortgages and SBA-guaranteed loans, were $106.1 million at September 30, 2019 and $108.4 million at December 31, 2018.

 

FNCB does not have any lending programs commonly referred to as "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’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, 2019. Refer to Note 2, “Summary of Significant Accounting Policies” to FNCB’s consolidated financial statements included in the 2018 Annual Report on Form 10-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.

 

Management evaluates the credit quality of the loan portfolio on an ongoing basis, and performs a formal review of the adequacy of the ALLL on a quarterly basis. This evaluation is inherently subjective, as it 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 material negative effect on FNCB’s operating results or 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. 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.

 

The following table summarizes activity in the ALLL by loan category for the three and nine months ended September 30, 2019 and 2018.

 

 

 

 

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, 2019 and December 31, 2018:

 

 

 

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’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 as: 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 as 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

 

 

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 tables present the recorded investment in loans receivable by loan category and credit quality indicator at September 30, 2019 and December 31, 2018:

 

 

 

 

 

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 $6.1 million and $4.7 million at September 30, 2019 and December 31, 2018, respectively. Generally, loans are placed on non-accrual status when they become 90 days or more delinquent. Once a loan is placed on non-accrual status, it remains on non-accrual status until it has been brought current, 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, 2019 and December 31, 2018.

 

 

The following tables present the delinquency status of past due and non-accrual loans at September 30, 2019 and December 31, 2018:

 

 

 

 

 

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, 2019 and December 31, 2018. Non-accrual loans, other than TDRs, with balances less than the $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 homogeneous pools in the general allowance under ASC Topic 450. Total non-accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold that were evaluated under ASC Topic 450 amounted to $0.9 million at September 30, 2019 and $0.7 million at December 31, 2018.

 

 

 

 

The following table presents the average balance and interest income by loan category recognized on impaired loans for the three and nine months ended September 30, 2019 and 2018:

 

(1) Interest income represents income recognized on performing TDRs.

 

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 $90 thousand and $267 thousand, respectively for the three and nine months ended September 30, 2019 and $65 thousand and $150 thousand, respectively, for the three and nine months ended September 30, 2018.

 

 

Troubled Debt Restructured Loans

 

TDRs at September 30, 2019 and December 31, 2018 were $8.1 million and $9.2 million, respectively. Accruing and non-accruing TDRs were $7.8 million and $0.3 million, respectively, at September 30, 2019, and $8.5 million and $0.7 million, respectively, at December 31, 2018. Approximately $123 thousand and $651 thousand in specific reserves have been established for TDRs as of September 30, 2019 and December 31, 2018, respectively. FNCB was not committed to lend additional funds to any loan classified as a TDR at September 30, 2019.

 

The modification of the terms of 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 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. 

 

 

 

There were no loans modified as a TDR during the three and nine months ended September 30, 2018. There were no loans modified as a TDR within the previous 12 months that subsequently defaulted, defined as 90 days or more past due, during the nine months ended September 30, 2019 and 2018.

 

Residential Real Estate Loan Foreclosures

 

There were two consumer mortgage loans with an aggregate recorded investment of $154 thousand secured by residential real estate properties in the process of foreclosure at September 30, 2019. There was one investor-owned residential real estate property with an aggregate carrying value of $204 thousand that was foreclosed upon during the three and nine months ended September 30, 2019. For the nine months ended September 30, 2019, there were two residential real estate properties with an aggregate carrying value of $256 thousand foreclosed upon and included in OREO at September 30, 2019. 

 

There were four consumer mortgage loans secured by residential real estate properties with an aggregate recorded investment of $20 thousand in the process of foreclosure at September 30, 2018.  For the three and nine months ended September 30, 2018, there were no residential real estate properties foreclosed upon, and there was one residential real estate property with a carrying value of $59 thousand included in OREO at September 30, 2018.