Note

LOANS

The following table summarizes loans receivable, net, by category at

December 31,

2019

and

2018:

	December 31,
(in thousands)	2019			2018
Residential real estate	$	170,723		$	164,833
Commercial real estate		278,379			262,778
Construction, land acquisition and development		47,484			20,813
Commercial and industrial		147,623			150,962
Consumer		138,239			176,784
State and political subdivisions		43,908			59,037
Total loans, gross		826,356			835,207
Unearned income		(69	)		(70	)
Net deferred loan costs		2,192			3,963
Allowance for loan and lease losses		(8,950	)		(9,519	)
Loans, net	$	819,529		$	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

11,

“Related Party Transactions” to these consolidated financial statements.

For information about credit concentrations within FNCB

’s loan portfolio, refer to Note

12,

“Commitments, Contingencies and Concentrations” to these consolidated financial statements.

FNCB originates

family mortgage loans for sale in the secondary market. During both of the years ended

December 31,

2019

and

2018

family mortgages sold on the secondary market were

$9.6

million. Net gains on the sale of residential mortgage loans were

$253

thousand in

2019

and

$210

thousand in

2018.

FNCB retains servicing rights on mortgages sold in the secondary market. At

December 31, 2019

and

December 31, 2018,

there were

$1.1

million and

$820

thousand in

family residential mortgage loans held for sale, respectively.

For the year

ended

December 31,

2018,

FNCB sold the guaranteed principal balance of loans that were guaranteed by the Small Business Administration (“SBA”) totaling

$5.7

million. Net gains realized upon the sales, included in non-interest income, totaled

$322

thousand in

2018.

FNCB has retained the servicing rights on these loans. There were

sales of the guaranteed principal balance of SBA loans during the year ended December

31,

2019.

The unpaid principal balance of loans serviced for others, including residential mortgages and SBA-guaranteed loans were

$106.0

million and

$108.4

million at

December 31, 2019

and

2018,

respectively.

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.

FNCB provides for loan losses based on the consistent application of its documented ALLL methodology. Loan losses are charged to the ALLL and recoveries are credited to it. Additions to the ALLL are provided by charges against income based on various factors which, in management

’s judgment, deserve current recognition of estimated probable losses. Loan losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Generally, FNCB will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated recoverable amount based on its methodology detailed below. Management regularly reviews the loan portfolio and makes adjustments for loan losses in order to maintain the ALLL in accordance with GAAP. The ALLL consists primarily of the following

two

components:

(

)

Specific allo

wances are established for impaired loans, which FNCB defines as all loan relationships with an aggregate outstanding balance greater than

$100

thousand rated substandard and on non

accrual, loans rated doubtful or loss, and all TDRs. The amount of impairment provided for as an allowance is represented by the deficiency, if any, between the carrying value of the loan and either (a) the present value of expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price, or (c) the fair value of the underlying collateral, less estimated costs to sell, for collateral dependent loans. Impaired loans that have

impairment losses are

not

considered in the establishment of general valuation allowances as described below. If management determines that collection of the impairment amount is remote, a charge-off will be recorded for the impairment amount.

(

)

General allowances are established for loan losses on a portfolio basis for

loans that do

not

meet the definition of impaired. FNCB divides its portfolio into loan segments for loans exhibiting similar characteristics. Loans rated special mention or substandard and accruing, which are embedded in these loan segments, are then separated from these loan segments, as these loans are subject to an analysis that emphasizes the credit risk associated with these loans. An estimated loss rate is then applied to each loan segment, which are based on FNCB’s own historical loss experience for each respective loan segment. In addition, management evaluates and applies to each loan segment certain qualitative or environmental factors that are likely to cause estimated credit losses associated with FNCB’s existing portfolio to differ from historical experience, which are discussed below. For loans that have an internal credit rating of special mention or substandard, the qualitative and environmental factors are further adjusted for the increased risk.

As part of its evaluation, management considers qualitative and environmental factors, including, but

not

limited to:

●

changes in national, local, and business economic conditions and developments, including the condition of various market segments;

●

changes in the nature and volume of the loa

n portfolio;

●

changes in lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices and results;

●

changes in the experience, ability and depth of

lending management and staff;

●

changes in the quality of

the loan review system and the degree of oversight by the Board of Directors;

●

changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual loans, TDRs and other loan modifications;

●

the e

xistence and effect of any concentrations of credit and changes in the level of such concentrations;

●

the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portf

olio; and

●

analysis of customers

’ credit quality, including knowledge of their operating environment and financial condition.

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 tables present, by loan category, the activity in the ALLL and the allocation of the ALLL and related loan balance disaggregated based on impairment methodology at

December 31,

2019

and

2018

Allowance for Loan and Lease Losses by Loan Category
December 31, 2019
(in thousands)	Residential Real Estate			Commercial Real Estate		Construction, Land Acquisition and Development			Commercial and Industrial			Consumer			State and Political Subdivisions			Unallocated		Total
Allowance for loan losses:
Beginning balance, January 1, 2019	$	1,175		$	3,107	$	188		$	2,552		$	2,051		$	417		$	29	$	9,519
Charge-offs		(27	)		-		(18	)		(1,258	)		(1,311	)		-			-		(2,614	)
Recoveries		9			32		82			364			761			-			-		1,248
Provisions (credits)		(10	)		59		19			339			157			(164	)		397		797
Ending balance, December 31, 2019	$	1,147		$	3,198	$	271		$	1,997		$	1,658		$	253		$	426	$	8,950

Specific reserve	$	9		$	221	$	-		$	242		$	1		$	-		$	-	$	473

General reserve	$	1,138		$	2,977	$	271		$	1,755		$	1,657		$	253		$	426	$	8,477

Loans receivable:
Individually evaluated for impairment	$	2,711		$	11,640	$	76		$	1,164		$	195		$	-		$	-	$	15,786
Collectively evaluated for impairment		168,012			266,739		47,408			146,459			138,044			43,908			-		810,570
Total loans, gross at December 31, 2019	$	170,723		$	278,379	$	47,484		$	147,623		$	138,239		$	43,908		$	-	$	826,356

Allowance for Loan and Lease Losses by Loan Category
December 31, 2018
(in thousands)	Residential Real Estate			Commercial Real Estate			Construction, Land Acquisition and Development			Commercial and Industrial			Consumer			State and Political Subdivisions		Unallocated		Total
Allowance for loan losses:
Beginning balance, January 1, 2018	$	1,236		$	3,499		$	209		$	2,340		$	1,395		$	355	$	-	$	9,034
Charge-offs		(63	)		(1,845	)		-			(97	)		(1,134	)		-		-		(3,139	)
Recoveries		135			42			30			291			576			-		-		1,074
Provisions (credits)		(133	)		1,411			(51	)		18			1,214			62		29		2,550
Ending balance, December 31, 2018	$	1,175		$	3,107		$	188		$	2,552		$	2,051		$	417	$	29	$	9,519

Specific reserve	$	14		$	41		$	-		$	600		$	2		$	-	$	-	$	657

General reserve	$	1,161		$	3,066		$	188		$	1,952		$	2,049		$	417	$	29	$	8,862

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 loans, gross at December 31, 2018	$	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 commercial loan classification and credit grading processes are part of the lending, underwriting, and credit administration functions to ensure an ongoing assessment of credit quality. FNCB maintains a formal, written loan classification and credit grading system that includes a discussion of the factors used to assign appropriate classifications of credit grades to loans. The risk grade groupings provide a mechanism to identify risk within the loan portfolio and provide management and the board of directors with periodic reports by risk category. The process also identifies groups of loans that warrant the special attention of management. Accurate and timely loan classification and credit grading is a critical component of loan portfolio management. Loan officers are required to review their loan portfolio risk ratings regularly for accuracy. In addition, the credit risk ratings play an important role in the loan review function, as well as the establishment and evaluation of the provision for loan and lease losses and the ALLL.

The loan review function uses the same risk rating system in the loan review process. Quarterly, FNCB engages an independent

third

party to assess the quality of the loan portfolio and evaluate the accuracy of ratings with the loan officer

’s and management’s assessment.

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:

Minimal Risk

Above Average Credit Quality

Average Risk

Acceptable Risk

Pass - Watch

Special Mention

Substandard - Accruing

Substandard - Non-Accrual

Doubtful

10.

Loss

This analysis is performed on a quarterly basis using the following definitions for risk ratings:

Pass

– Assets rated

through

are considered pass ratings. These assets show

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 TDR 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

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 qualit

y indicator at

December 31, 2019

and

2018:

Credit Quality Indicators
December 31, 2019
	Commercial Loans												Other Loans
			Special								Subtotal		Accruing		Non-accrual		Subtotal		Total
	Pass		Mention		Substandard		Doubtful		Loss		Commercial		Loans		Loans		Other		Loans
Residential real estate	$	32,219	$	177	$	307	$	-	$	-	$	32,703	$	136,709	$	1,311	$	138,020	$	170,723
Commercial real estate		266,112		1,668		10,599		-		-		278,379		-		-		-		278,379
Construction, land acquisition and development		46,361		-		-		-		-		46,361		1,123		-		1,123		47,484
Commercial and industrial		140,589		426		1,484		-		-		142,499		5,124		-		5,124		147,623
Consumer		3,111		-		-		-		-		3,111		134,457		671		135,128		138,239
State and political subdivisions		43,908		-		-		-		-		43,908		-		-		-		43,908
Total	$	532,300	$	2,271	$	12,390	$	-	$	-	$	546,960	$	277,413	$	1,982	$	279,395	$	826,356

Credit Quality Indicators
December 31, 2018
	Commercial Loans												Other Loans
			Special								Subtotal		Accruing		Non-accrual		Subtotal		Total
	Pass		Mention		Substandard		Doubtful		Loss		Commercial		Loans		Loans		Other		Loans
Residential real estate	$	33,573	$	291	$	154	$	-	$	-	$	34,018	$	130,132	$	683	$	130,815	$	164,833
Commercial real estate		250,674		1,858		10,246		-		-		262,778		-		-		-		262,778
Construction, land acquisition and development		17,704		-		757		-		-		18,461		2,352		-		2,352		20,813
Commercial and industrial		137,888		4,193		2,448		-		-		144,529		6,421		12		6,433		150,962
Consumer		2,024		-		-		-		-		2,024		174,373		387		174,760		176,784
State and political subdivisions		57,345		1,665		27		-		-		59,037		-		-		-		59,037
Total	$	499,208	$	8,007	$	13,632	$	-	$	-	$	520,847	$	313,278	$	1,082	$	314,360	$	835,207

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded investment in these non-accrual loans was

$9.1

million

December 31, 2019

and

$4.7

million at

December 31, 2018

. Generally, loans are placed on non-accrual status when they become

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

longer exists. Therefore, loans

may

be current in accordance with their loan terms, or

may

be less than

days delinquent and still be on a non-accrual status. There were

loans past due

days or more and still accruing at

December 31, 2019

and

2018.

The following tables present the delinquency status of past due and non-accrual loans at

December 31, 2019

and

2018:

	December 31, 2019
	Delinquency Status
	0-29 Days		30-59 Days		60-89 Days		>/= 90 Days
(in thousands)	Past Due		Past Due		Past Due		Past Due		Total
Performing (accruing) loans:
Residential real estate	$	168,754	$	134	$	261	$	-	$	169,149
Commercial real estate		272,561		75		106		-		272,742
Construction, land acquisition and development		47,484		-		-		-		47,484
Commercial and industrial		146,221		200		-		-		146,421
Consumer		135,384		1,695		489		-		137,568
State and political subdivisions		43,908		-		-		-		43,908
Total performing (accruing) loans		814,312		2,104		856		-		817,272

Non-accrual loans:
Residential real estate		873		17		228		456		1,574
Commercial real estate		2,520		893		434		1,790		5,637
Construction, land acquisition and development		-		-		-		-		-
Commercial and industrial		943		-		114		145		1,202
Consumer		193		93		38		347		671
State and political subdivisions		-		-		-		-		-
Total non-accrual loans		4,529		1,003		814		2,738		9,084
Total loans receivable	$	818,841	$	3,107	$	1,670	$	2,738	$	826,356

	December 31, 2018
	Delinquency Status
	0-29 Days		30-59 Days		60-89 Days		>/= 90 Days
(in thousands)	Past Due		Past Due		Past Due		Past Due		Total
Performing (accruing) loans:
Residential real estate	$	163,690	$	319	$	136	$	-	$	164,145
Commercial real estate		259,904		-		-		-		259,904
Construction, land acquisition and development		20,813		-		-		-		20,813
Commercial and industrial		150,108		87		20		-		150,215
Consumer		173,890		2,221		286		-		176,397
State and political subdivisions		59,037		-		-		-		59,037
Total performing (accruing) loans		827,442		2,627		442		-		830,511

Non-accrual loans:
Residential real estate		443		-		136		109		688
Commercial real estate		1,061		-		-		1,813		2,874
Construction, land acquisition and development		-		-		-		-		-
Commercial and industrial		677		50		-		20		747
Consumer		91		61		74		161		387
State and political subdivisions		-		-		-		-		-
Total non-accrual loans		2,272		111		210		2,103		4,696
Total loans receivable	$	829,714	$	2,738	$	652	$	2,103	$	835,207

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,

December 31, 2019

and

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

450.

Total non-accrual loans, other than TDRs, with balances less than the

$100

thousand loan relationship threshold that were evaluated under ASC

450

amounted to

$1.0

million and

$0.7

million at

December 31, 2019

and

2018, respectively.

	December 31, 2019
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no allowance recorded:
Residential real estate	$	1,217	$	1,303	$	-
Commercial real estate		4,548		6,007		-
Construction, land acquisition and development		76		76		-
Commercial and industrial		593		850		-
Consumer		23		26		-
State and political subdivisions		-		-		-
Total impaired loans with no related allowance recorded		6,457		8,262		-

With a related allowance recorded:
Residential real estate		1,494		1,494		9
Commercial real estate		7,092		7,811		221
Construction, land acquisition and development		-		-		-
Commercial and industrial		571		573		242
Consumer		172		172		1
State and political subdivisions		-		-		-
Total impaired loans with a related allowance recorded		9,329		10,050		473

Total of impaired loans:
Residential real estate		2,711		2,797		9
Commercial real estate		11,640		13,818		221
Construction, land acquisition and development		76		76		-
Commercial and industrial		1,164		1,423		242
Consumer		195		198		1
State and political subdivisions		-		-		-
Total impaired loans	$	15,786	$	18,312	$	473

	December 31, 2018
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no allowance recorded:
Residential real estate	$	313	$	375	$	-
Commercial real estate		7,149		8,795		-
Construction, land acquisition and development		82		82		-
Commercial and industrial		-		-		-
Consumer		26		28		-
State and political subdivisions		-		-		-
Total impaired loans with no related allowance recorded		7,570		9,280		-

With a related allowance recorded:
Residential real estate		1,534		1,534		14
Commercial real estate		2,259		2,259		41
Construction, land acquisition and development		-		-		-
Commercial and industrial		697		697		600
Consumer		357		357		2
State and political subdivisions		-		-		-
Total impaired loans with a related allowance recorded		4,847		4,847		657

Total of impaired loans:
Residential real estate		1,847		1,909		14
Commercial real estate		9,408		11,054		41
Construction, land acquisition and development		82		82		-
Commercial and industrial		697		697		600
Consumer		383		385		2
State and political subdivisions		-		-		-
Total impaired loans	$	12,417	$	14,127	$	657

The following table presents the average balance of, and interest income recognized on, impaired loans summarized by loan category for the years ended

December 31,

2019

and

2018

	Year Ended December 31,
	2019				2018
	Average		Interest		Average		Interest
(in thousands)	Balance		Income (1)		Balance		Income (1)
Residential real estate	$	2,157	$	84	$	1,827	$	83
Commercial real estate		10,092		297		8,580		311
Construction, land acquisition and development		79		5		83		5
Commercial and industrial		1,207		1		759		1
Consumer		243		11		388		17
State and political subdivisions		-		-		-		-
Total impaired loans	$	13,778	$	398	$	11,637	$	417

(

) 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

$0.4

million and

$0.2

million for the years ended

December 31, 2019 and 2018, respectively.

Troubled Debt Restructured Loans

TDRs at

December 31,

2019

and

2018

were

$9.1

million

and

$9.2

million, respectively. Accruing and non-accruing TDRs were

$7.7

million and

$1.4

million

respectively at

December 31, 2019

and

$8.5

million and

$0.7

million, respectively at

December 31, 2018.

Approximately

$97

thousand and

$651

thousand in specific reserves have been established for TDRs as of

December 31, 2019

and

2018,

respectively. FNCB was

not

committed to lend additional funds to any loan classified as a TDR at

December 31, 2019

and

2018.

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.

There were

loans

modified as TDRs during the year ended

December 31, 2018.

The following table presents the pre- and post-modification recorded investment in loans modified as TDRs and type of modifications made during the year ended

December 31, 2019

	Year Ended December 31, 2019
			Pre-Modification Outstanding Recorded Investment by
			Type of Modification
(in thousands)	Number of Contracts		Extension of Term		Extension of Term and Capitalization of Taxes		Capitalization of Taxes		Principal Forbearance		Total		Post-Modification Outstanding Recorded Investment
Loan category:
Residential real estate		4	$	24	$	-	$	42	$	208	$	274	$	289
Commercial real estate		2		432		178		-		-		610		644
Construction, land acquisition and development		-		-		-		-		-		-		-
Commercial and industrial		4		933		-		-		-		933		932
Consumer		-		-		-		-		-		-		-
State and political subdivisions		-		-		-		-		-		-		-
Total modifications		10	$	1,389	$	178	$	42	$	208	$	1,817	$	1,865

There were

TDRs modified within the previous

months that defaulted during the years ended

December 31, 2019

and

2018.

Residential Real Estate Loan Foreclosures

There was

one

residential real estate property with a recorded investment of

$154

thousand that was in the process of foreclosure at

December 31, 2019.

There were

two

investor-owned residential real estate properties with an aggregate carrying value of

$256

thousand foreclosed upon during the year ended

December 31, 2019.

One

property was subsequently sold during

2019.

The remaining property with a carrying value of

$204

thousand was included in OREO at

December 31, 2019.

There were

two

consumer mortgage loans secured by residential real estate properties

in the process of foreclosure at

December 31, 2018. There was

aggregate recorded investment to FNCB for these two loans at December 31, 2018. The balance of

one

loan was previously charged-off in entirety and the other loan was sold to an investor on the secondary market.

There were

residential real estate properties foreclosed upon during the year ended

December 31, 2018, and there was one residential real estate property with a carrying value of

$45

thousand included in OREO at December 31, 2018.