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Section 1: 10-Q (FORM 10-Q)

fncb20180331_10q.htm
 

 

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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 ended March 31, 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)

 

Registrant’s telephone number, including area code (570) 346-7667

 

 

 

 

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 ☒

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

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 the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 20,109,713 shares as of May 3, 2019

 



 

1

 

 
Contents  
PART I. Financial Information 3
Item 1. Financial Statements (unaudited) 3
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Comprehensive Income (Loss) 5
Consolidated Statements of Changes in Shareholders’ Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 48
Item 4. Controls and Procedures 49
PART II.  Other Information 49
Item 1. Legal Proceedings. 49
Item 1A. Risk Factors. 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 49
Item 3. Defaults upon Senior Securities. 49
Item 4. Mine Safety Disclosures. 50
Item 5. Other Information. 50
Item 6. Exhibits. 50

     

2

 

 

Part I - Financial Information

Item 1 - Financial Statements

FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(unaudited)

 

   

March 31,

   

December 31,

 

(in thousands, except share data)

 

2019

   

2018

 

Assets

               

Cash and cash equivalents:

               

Cash and due from banks

  $ 25,683     $ 26,673  

Interest-bearing deposits in other banks

    7,062       9,808  

Total cash and cash equivalents

    32,745       36,481  

Available-for-sale debt securities, at fair value

    274,114       296,032  

Equity securities, at fair value

    903       891  

Restricted stock, at cost

    3,120       3,123  

Loans held for sale

    609       820  

Loans, net of allowance for loan and lease losses of $9,253 and $9,519

    829,611       829,581  

Bank premises and equipment, net

    14,991       14,425  

Accrued interest receivable

    3,706       3,614  

Bank-owned life insurance

    31,146       31,015  

Other real estate owned

    919       919  

Net deferred tax assets

    9,194       10,693  

Other assets

    13,393       10,138  

Total assets

  $ 1,214,451     $ 1,237,732  
                 

Liabilities

               

Deposits:

               

Demand (non-interest-bearing)

  $ 157,073     $ 156,600  

Interest-bearing

    883,017       939,029  

Total deposits

    1,040,090       1,095,629  

Borrowed funds:

               

Federal Home Loan Bank of Pittsburgh advances

    28,988       18,930  

Subordinated debentures

    -       5,000  

Junior subordinated debentures

    10,310       10,310  

Total borrowed funds

    39,298       34,240  

Accrued interest payable

    339       338  

Other liabilities

    10,942       10,306  

Total liabilities

    1,090,669       1,140,513  
                 

Shareholders' equity

               

Preferred shares ($1.25 par)

               

Authorized: 20,000,000 shares at March 31, 2019 and December 31, 2018

               

Issued and outstanding: 0 shares at March 31, 2019 and December 31, 2018

    -       -  

Common shares ($1.25 par)

               

Authorized: 50,000,000 shares at March 31, 2019 and December 31, 2018

               

Issued and outstanding: 20,108,560 shares at March 31, 2019 and 16,821,371 shares at December 31, 2018

    25,135       21,026  

Additional paid-in capital

    80,827       63,547  

Retained earnings

    18,809       17,186  

Accumulated other comprehensive loss

    (989 )     (4,540 )

Total shareholders' equity

    123,782       97,219  

Total liabilities and shareholders’ equity

  $ 1,214,451     $ 1,237,732  

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

3

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FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   

Three Months Ended
March 31,

 

(in thousands, except share data)

 

2019

   

2018

 

Interest income

               

Interest and fees on loans

  $ 9,407     $ 8,288  

Interest and dividends on securities:

               

U.S. government agencies

    893       890  

State and political subdivisions, tax free

    37       20  

State and political subdivisions, taxable

    1,021       1,024  

Other securities

    205       195  

Total interest and dividends on securities

    2,156       2,129  

Interest on interest-bearing deposits in other banks

    46       23  

Total interest income

    11,609       10,440  

Interest expense

               

Interest on deposits

    2,238       1,067  

Interest on borrowed funds:

               

Interest on Federal Home Loan Bank of Pittsburgh advances

    287       352  

Interest on subordinated debentures

    24       56  

Interest on junior subordinated debentures

    114       87  

Total interest on borrowed funds

    425       495  

Total interest expense

    2,663       1,562  

Net interest income before (credit) provision for loan and lease losses

    8,946       8,878  

(Credit) provision for loan and lease losses

    (154 )     720  

Net interest income after (credit) provision for loan and lease losses

    9,100       8,158  

Non-interest income

               

Deposit service charges

    685       702  

Net gain on the sale of available-for-sale debt securities

    160       -  

Net gain (loss) on equity securities

    12       (19 )

Net gain on the sale of mortgage loans held for sale

    56       49  

Net gain on the sale of SBA guaranteed loans

    -       251  

Net gain on the sale of other real estate owned

    -       38  

Loan-related fees

    79       84  

Income from bank-owned life insurance

    131       134  

Other

    392       280  

Total non-interest income

    1,515       1,519  

Non-interest expense

               

Salaries and employee benefits

    3,899       3,666  

Occupancy expense

    550       603  

Equipment expense

    307       314  

Advertising expense

    197       113  

Data processing expense

    781       648  

Regulatory assessments

    168       201  

Bank shares tax

    278       267  

Expense of other real estate owned

    51       45  

Professional fees

    332       296  

Insurance expense

    126       135  

Other losses

    9       41  

Other operating expenses

    727       903  

Total non-interest expense

    7,425       7,232  

Income before income tax expense

    3,190       2,445  

Income tax expense

    555       426  

Net income

  $ 2,635     $ 2,019  
                 

Earnings per share

               

Basic

  $ 0.14     $ 0.12  

Diluted

  $ 0.14     $ 0.12  
                 

Cash dividends declared per common share

  $ 0.05     $ 0.04  

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

               

Basic

    18,720,502       16,763,401  

Diluted

    18,733,652       16,789,336  

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

 

   

Three Months Ended
March 31,

 

(in thousands)

 

2019

   

2018

 

Net income

  $ 2,635     $ 2,019  

Other comprehensive income (loss):

               

Unrealized gains (losses) on available-for-sale debt securities

    4,655       (4,976 )

Taxes

    (978 )     1,044  

Net of tax amount

    3,677       (3,932 )
                 

Reclassification adjustment for gains included in net income

    (160 )     -  

Taxes

    34       -  

Net of tax amount

    (126 )     -  
                 

Total other comprehensive income (loss)

    3,551       (3,932 )
                 

Comprehensive income (loss)

  $ 6,186     $ (1,913 )

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2019 and 2018

(unaudited)

 

(in thousands, except per share data)

 

Number of Common Shares

   

Common Stock

   

Additional Paid-in Capital

   

Retained Earnings

   

Accumulated Other Comprehensive Loss

   

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  
                                                 

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  

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   

Three Months Ended
March 31,

 

(in thousands)

 

2019

   

2018

 

Cash flows from operating activities:

               

Net income

  $ 2,635     $ 2,019  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Investment securities amortization, net

    212       188  

Equity in trust

    (3 )     (3 )

Depreciation and amortization

    802       674  

Valuation adjustment for loan servicing rights

    1       -  

Stock-based compensation expense

    67       72  

(Credit) provision for loan and lease losses

    (154 )     720  

Valuation adjustment for off-balance sheet commitments

    21       (10 )

Net gain on the sale of available-for-sale debt securities

    (160 )     -  

Net (gain) loss on equity securities

    (12 )     19  

Net gain on the sale of mortgage loans held for sale

    (56 )     (49 )

Net gain on the sale of SBA guaranteed loans

    -       (251 )

Net gain on the sale of other real estate owned

    -       (38 )

Valuation adjustment of other real estate owned

    -       17  

Income from bank-owned life insurance

    (131 )     (134 )

Proceeds from the sale of mortgage loans held for sale

    1,858       2,878  

Funds used to originate mortgage loans held for sale

    (1,591 )     (2,100 )

Decrease in net deferred tax assets

    555       424  

Increase in accrued interest receivable

    (92 )     (196 )

(Increase) decrease in prepaid expenses and other assets

    (3,257 )     548  

Increase in accrued interest payable

    1       43  

Increase in accrued expenses and other liabilities

    603       53  

Total adjustments

    (1,336 )     2,855  

Net cash provided by operating activities

    1,299       4,874  
                 

Cash flows from investing activities:

               

Maturities, calls and principal payments of available-for-sale debt securities

    1,230       1,334  

Proceeds from the sale of available-for-sale debt securities

    25,130       -  

Purchases of available-for-sale debt securities

    -       (15,353 )

Redemption (purchase) of the stock in Federal Home Loan Bank of Pittsburgh

    3       (2,940 )

Net increase in loans to customers

    (333 )     (43,006 )

Proceeds from the sale of SBA guaranteed loans

    -       5,206  

Proceeds from the sale of other real estate owned

    -       465  

Purchases of bank premises and equipment

    (894 )     (2,840 )

Net cash provided by (used in) investing activities

    25,136       (57,134 )
                 

Cash flows from financing activities:

               

Net decrease in deposits

    (55,539 )     (47,195 )

Net proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight

    8,400       59,325  

Proceeds from Federal Home Loan Bank of Pittsburgh advances - term

    8,478       27,631  

Repayment of Federal Home Loan Bank of Pittsburgh advances - term

    (6,820 )     (10,439 )

Principal reduction on subordinated debentures

    (5,000 )     -  

Proceeds from issuance of common shares, net of discount

    21,316       59  

Cash dividends paid

    (1,006 )     (671 )

Net cash (used in) provided by financing activities

    (30,171 )     28,710  

Net decrease in cash and cash equivalents

    (3,736 )     (23,550 )

Cash and cash equivalents at beginning of period

    36,481       37,746  

Cash and cash equivalents at end of period

  $ 32,745     $ 14,196  
                 

Supplemental cash flow information

               

Cash paid during the period for:

               

Interest

  $ 2,662     $ 1,519  

Income taxes

    -       18  

Other transactions:

               

Lease liabilities arising from obtaining right-of-use assets

    12       -  
                 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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FNCB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

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 months ended March 31, 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 Standards Update ("ASU") 2016-02, Leases (Topic 842): “Leases” requires 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 requires both finance and operating leases to be recognized on the balance sheet. ASU 2016-02 also requires 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 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 business entities. An entity may adopt the new guidance either by restating prior periods and recording a cumulative effect adjustment at the beginning of the earliest comparative period presented or by recording a cumulative effect adjustment at the beginning of the period of adoption. FNCB adopted this guidance on January 1, 2019 and applied the standard by recording a cumulative effect adjustment at that date. Management performed a comprehensive evaluation of the effect this guidance may have on its operating results or financial position, including working with various business units within the organization and reviewing contractual arrangements for embedded leases in an effort to identify FNCB’s full lease population. Based on management's evaluation, the adoption of ASU 2016-02 resulted in FNCB recording an aggregate lease liability and right of use ("ROU") asset of $3.6 million for its operating lease commitments.

 

ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310): “Premium Amortization on Purchased Callable Debt Securities” requires that the amortization period for certain callable debt securities be shortened to the earliest call date. The amortization of callable securities held at a discount is not affected. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 for public business entities. The adoption of this guidance on January 1, 2019 did not have a material effect on the operating results or financial position of FNCB.

 

Accounting Guidance to be Adopted in Future Periods

 

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 is effective for public business entities that are U.S. Securities and Exchange Commission (“SEC”) filers 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. Accordingly, FNCB will adopt this guidance on January 1, 2020. 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 with the provisions of ASU 2016-13 and is 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 to develop appropriate forecasts for integration into the model.  FNCB plans to begin running parallel computations using the current GAAP incurred loss model in the second quarter of 2019. 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.

 

8

 

 

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 March 31, 2019 and December 31, 2018:

 

   

March 31, 2019

 
           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

         
   

Amortized

   

Holding

   

Holding

   

Fair

 

(in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 

Available-for-sale debt securities:

                               

Obligations of state and political subdivisions

  $ 132,165     $ 807     $ 848     $ 132,124  

U.S. government/government-sponsored agencies:

                               

Collateralized mortgage obligations - residential

    34,365       83       496       33,952  

Collateralized mortgage obligations - commercial

    75,948       8       813       75,143  

Mortgage-backed securities

    21,104       113       105       21,112  
Private collateralized mortgage obligations     2,782       28       3       2,807  

Corporate debt securities

    5,000       49       56       4,993  

Asset-backed securities

    1,573       -       13       1,560  

Negotiable certificates of deposit

    2,428       -       5       2,423  

Total available-for-sale debt securities

  $ 275,365     $ 1,088     $ 2,339     $ 274,114  

 

   

December 31, 2018

 
           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

         
   

Amortized

   

Holding

   

Holding

   

Fair

 

(in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 

Available-for-sale debt securities:

                               

Obligations of state and political subdivisions

  $ 154,268     $ 214     $ 2,295     $ 152,187  

U.S. government/government-sponsored agencies:

                               

Collateralized mortgage obligations - residential

    35,147       6       946       34,207  

Collateralized mortgage obligations - commercial

    76,038       -       2,398       73,640  

Mortgage-backed securities

    24,165       47       278       23,934  
Private collateralized mortgage obligations     2,908       7       2       2,913  

Corporate debt securities

    5,000       14       78       4,936  

Asset-backed securites

    1,825       -       23       1,802  

Negotiable certificates of deposit

    2,428       -       15       2,413  

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’ equity at March 31, 2019.

 

At March 31, 2019 and December 31, 2018, securities with a carrying amount of $264.8 million and $286.4 million, respectively, were pledged as collateral to secure public deposits and for other purposes.

 

9

 

The following table presents the maturity information of FNCB’s available-for-sale debt securities at March 31, 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.

 

   

March 31, 2019

 
   

Amortized

   

Fair

 

(in thousands)

 

Cost

   

Value

 

Amounts maturing in:

               

One year or less

  $ 1,734     $ 1,731  

After one year through five years

    56,360       56,370  

After five years through ten years

    77,470       77,490  

After ten years

    4,029       3,949  

Collateralized mortgage obligations

    113,095       111,902  

Mortgage-backed securities

    21,104       21,112  

Asset-backed securities

    1,573       1,560  

Total

  $ 275,365     $ 274,114  

 

Gross proceeds from the sale of available-for-sale debt securities were $25.1 million for the three months ended March 31, 2019, with gross gains and losses of $176 thousand and $16 thousand, respectively realized upon the sale. There were no sales of available-for-sale debt securities during the three months ended March 31, 2018. 

 

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

 

   

March 31, 2019

 
   

Less than 12 Months

   

12 Months or Greater

   

Total

 
   

Number

           

Gross

   

Number

           

Gross

   

Number

           

Gross

 
   

of

   

Fair

   

Unrealized

   

of

   

Fair

   

Unrealized

   

of

   

Fair

   

Unrealized

 

(dollars in thousands)

 

Securities

   

Value

   

Losses

   

Securities

   

Value

   

Losses

   

Securities

   

Value

   

Losses

 

Obligations of state and policitical subdivisions

    2     $ 761     $ 10       54     $ 63,226     $ 838       56     $ 63,987     $ 848  

U.S. government/government-sponsored agencies:

                                                                       

Collateralized mortgage obligations - residential

    -       -       -       11       24,424       496       11       24,424       496  

Collateralized mortgage obligations - commercial

    -       -       -       23       71,655       813       23       71,655       813  

Mortgage-backed securities

    -       -       -       6       10,453       105       6       10,453       105  
Private collateralized mortgage obligations     1       874       3       -       -       -       1       874       3  

Corporate debt securities

    1       998       2       1       1,946       54       2       2,944       56  

Asset-backed securities

    -       -       -       2       1,560       13       2       1,560       13  

Negotiable certificates of deposit

    -       -       -       10       2,423       5       10       2,423       5  

Total available-for-sale debt securities

    4     $ 2,633     $ 15       107     $ 175,687     $ 2,324       111     $ 178,320     $ 2,339  

 

10

 

   

December 31, 2018

 
   

Less than 12 Months

   

12 Months or Greater

   

Total

 
   

Number

           

Gross

   

Number

           

Gross

   

Number

           

Gross

 
   

of

   

Fair

   

Unrealized

   

of

   

Fair

   

Unrealized

   

of

   

Fair

   

Unrealized

 

(dollars in thousands)

 

Securities

   

Value

   

Losses

   

Securities

   

Value

   

Losses

   

Securities

   

Value

   

Losses

 

Obligations of state and policitical 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

    -       -       -       14       31,414       946       14       31,414       946  

Collateralized mortgage obligations - commercial

    -       -       -       25       73,640       2,398       25       73,640       2,398  

Mortgage-backed securities

    1       52       -       6       10,294       278       7       10,346       278  
Private collateralized mortgage obligations     1       950       2       -       -       -       1       950       2  

Corporate debt securities

    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  

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 111 securities in an unrealized loss position at March 31, 2019, including 56 obligations of state and political subdivisions, 40 securities issued by a U.S. government or government-sponsored agency, 10 negotiable certificates of deposit, two asset-backed securities, two corporate debt securities and one private collateralized mortgage obligation. Management performed a review of all securities in an unrealized loss position as of March 31, 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 March 31, 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 March 31, 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 March 31, 2019, this mutual fund had an amortized cost of $1.0 million and an unrealized loss of $96 thousand, resulting in a fair value of $903 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 three months ended March 31, 2019 and 2018.

 

   

March 31,

   

March 31,

 

(in thousands)

 

2019

   

2018

 

Net gains (losses) recognized on equity securities

  $ 12     $ (19 )

Less: net gains (losses) recognized on equity securities sold

    -       -  

Unrealized gains (losses) on equity securities held

  $ 12     $ (19 )

 

11

 

Restricted Securities

 

The following table presents FNCB's investment in restricted securities at March 31, 2019 and December 31, 2018.  Restricted securities have limited marketability and are carried at cost.

 

   

March 31,

   

December 31,

 

(in thousands)

 

2019

   

2018

 

Stock in Federal Home Loan Bank of Pittsburgh

  $ 3,110     $ 3,113  

Stock in Atlantic Community Banker's Bank

    10       10  

Total restricted securities, at cost

  $ 3,120     $ 3,123  

 

Management noted no indicators of impairment for the Federal Home Loan Bank of Pittsburgh or Atlantic Community Banker’s Bank stock at March 31, 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  March 31, 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  March 31, 2019, which indicated that the investment was not impaired.  Management determined that no adjustment for impairment was required at  March 31, 2019.

 

 

Note 4. Loans

 

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

 

   

March 31,

   

December 31,

 

(in thousands)

 

2019

   

2018

 

Residential real estate

  $ 161,938     $ 164,833  

Commercial real estate

    266,617       262,778  

Construction, land acquisition and development

    22,388       20,813  

Commercial and industrial

    156,521       150,962  

Consumer

    168,119       176,784  

State and political subdivisions

    59,784       59,037  

Total loans, gross

    835,367       835,207  

Unearned income

    (68 )     (70 )

Net deferred loan costs

    3,565       3,963  

Allowance for loan and lease losses

    (9,253 )     (9,519 )

Loans, net

  $ 829,611     $ 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 6, “Related Party Transactions” to these consolidated financial statements.

 

FNCB originates one- to four-family mortgage loans for sale in the secondary market. During the quarter ended March 31, 2019, one-to four-family mortgages sold on the secondary market were $1.9 million. Net gains on the sale of residential mortgage loans for the three months ended March 31, 2019 and 2018 were $56 thousand and $49 thousand, respectively. FNCB retains servicing rights on mortgages sold on the secondary market. At March 31, 2019 and December 31, 2018, there were $609 thousand and $820 thousand in one-to four-family residential mortgage loans held for sale, respectively.

 

12

 

There were no sales of guaranteed loans during the three months ended March 31, 2019. During the three months ended March 31, 2018, FNCB sold the guaranteed principal balance of loans that were guaranteed by the Small Business Administration (“SBA”) totaling $5.0 million. Net gains realized upon the sales for the period ended March 31, 2018 and included in non-interest income totaled $251 thousand. FNCB retained the servicing rights on these loans. The unpaid principal balance of loans serviced for others, including residential mortgages and SBA guaranteed loans were $107.6 million at March 31, 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 three months ended March 31, 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 months ended March 31, 2019 and 2018.

 

                   

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 March 31, 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

    -       -       -       (139 )     (315 )     -       -       (454 )

Recoveries

    4       -       81       84       173       -       -       342  

Provisions (credits)

    (24 )     (56 )     (163 )     2       54       6       27       (154 )

Ending balance, March 31, 2019

  $ 1,155     $ 3,051     $ 106     $ 2,499     $ 1,963     $ 423     $ 56     $ 9,253  
                                                                 

Three months ended March 31, 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 )     -       -       (77 )     (260 )     -       -       (400 )

Recoveries

    6       1       30       72       99       -       -       208  

Provisions (credits)

    70       (158 )     17       170       588       33       -       720  

Ending balance, March 31, 2018

  $ 1,249     $ 3,342     $ 256     $ 2,505     $ 1,822     $ 388     $ -     $ 9,562  

 

13

 

The following table represents the allocation of the ALLL and the related loan balance, by loan category, disaggregated based on the impairment methodology at March 31, 2019 and December 31, 2018:

 

                   

Construction,

                                         
                   

Land

                   

State and

                 
   

Residential

   

Commercial

   

Acquisition and

   

Commercial

           

Political

                 

(in thousands)

 

Real Estate

   

Real Estate

   

Development

   

and Industrial

   

Consumer

   

Subdivisions

   

Unallocated

   

Total

 

March 31, 2019

                                                               

Allowance for loan losses:

                                                               

Individually evaluated for impairment

  $ 13     $ 40     $ -     $ 851     $ 2     $ -     $ -     $ 906  

Collectively evaluated for impairment

    1,142       3,011       106       1,648       1,961       423       56       8,347  

Total

  $ 1,155     $ 3,051     $ 106     $ 2,499     $ 1,963     $ 423     $ 56     $ 9,253  
                                                                 

Loans receivable:

                                                               

Individually evaluated for impairment

  $ 1,834     $ 9,631     $ 81     $ 1,546     $ 380     $ -     $ -     $ 13,472  

Collectively evaluated for impairment

    160,104       256,986       22,307       154,975       167,739       59,784       -       821,895  

Total

  $ 161,938     $ 266,617     $ 22,388     $ 156,521     $ 168,119     $ 59,784     $ -     $ 835,367  
                                                                 

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’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

 

14

 

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.

 

15

 

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

 

   

Credit Quality Indicators

 
   

March 31, 2019

 
   

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

  $ 31,536     $ 252     $ 235     $ -     $ -     $ 32,023     $ 129,194     $ 721     $ 129,915     $ 161,938  

Commercial real estate

    254,254       1,661       10,702       -       -       266,617       -       -       -       266,617  

Construction, land acquisition and development

    20,343       -       -       -       -       20,343       2,027       18       2,045       22,388  

Commercial and industrial

    147,059       463       3,028       -       -       150,550       5,971       -       5,971       156,521  

Consumer

    2,389       -       -       -       -       2,389       165,290       440       165,730       168,119  

State and political subdivisions

    57,993       1,760       -       -       -       59,753       31       -       31       59,784  

Total

  $ 513,574     $ 4,136     $ 13,965     $ -     $ -     $ 531,675     $ 302,513     $ 1,179     $ 303,692     $ 835,367  

 

 

   

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