Note 4 - Loans

3 Months Ended

Mar. 31, 2020

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note

4.

Loans

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

March 31, 2020

and 

December 31, 2019

:

	March 31,			December 31,
(in thousands)	2020			2019
Residential real estate	$	171,764		$	170,723
Commercial real estate		276,662			278,379
Construction, land acquisition and development		43,929			47,484
Commercial and industrial		161,654			147,623
Consumer		129,192			138,239
State and political subdivisions		49,953			43,908
Total loans, gross		833,154			826,356
Unearned income		(51	)		(69	)
Net deferred loan costs		1,832			2,192
Allowance for loan and lease losses		(9,907	)		(8,950	)
Loans, net	$	825,028		$	819,529

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

8

, “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 ended

March 31, 2020

and

2019

, 1-4

 family mortgages sold on the secondary market were

$2.9

 million and

$1.9

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

$96

thousand for the

three

months ended

March 31, 2020

and

$56

 thousand for the

three

months ended March

31,

2019.

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

March 31, 2020

and 

December 31, 2019

,

there were

$0.5

 million and

$1.1

million in

1

-

4

 family residential mortgage loans held for sale, respectively.

There were

no

sales of Small Business Administration (“SBA”) guaranteed loans during the

three

months ended March

31,

2020

and

2019.

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

$105.7

 million at

March 31, 2020

and

$106.0

 million at

December 31, 2019

.

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, 2020

.

Refer to Note

2,

“Summary of Significant Accounting Policies” to FNCB’s consolidated financial statements included in the

2019

 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, 2020

and

2019

.

							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, 2020
Allowance for loan losses:
Beginning balance, January 1, 2020	$	1,147		$	3,198		$	271		$	1,997		$	1,658		$	253	$	426	$	8,950
Charge-offs		-			(56	)		-			(35	)		(238	)		-		-		(329	)
Recoveries		2			-			-			59			74			-		-		135
Provisions		158			415			12			283			220			17		46		1,151
Ending balance, March 31, 2020	$	1,307		$	3,557		$	283		$	2,304		$	1,714		$	270	$	472	$	9,907
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

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, 2020

and 

December 31, 2019

:

					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, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	8	$	205	$	-	$	209	$	1	$	-	$	-	$	423
Collectively evaluated for impairment		1,299		3,352		283		2,095		1,713		270		472		9,484
Total	$	1,307	$	3,557	$	283	$	2,304	$	1,714	$	270	$	472	$	9,907
Loans receivable:
Individually evaluated for impairment	$	2,558	$	11,309	$	74	$	992	$	192	$	-	$	-	$	15,125
Collectively evaluated for impairment		169,206		265,353		43,855		160,662		129,000		49,953		-		818,029
Total	$	171,764	$	276,662	$	43,929	$	161,654	$	129,192	$	49,953	$	-	$	833,154
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	9	$	221	$	-	$	242	$	1	$	-	$	-	$	473
Collectively evaluated for impairment		1,138		2,977		271		1,755		1,657		253		426		8,477
Total	$	1,147	$	3,198	$	271	$	1,997	$	1,658	$	253	$	426	$	8,950
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	$	170,723	$	278,379	$	47,484	$	147,623	$	138,239	$	43,908	$	-	$	826,356

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

March 31, 2020

and 

December 31, 2019

:

	Credit Quality Indicators
	March 31, 2020
	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	$	31,653	$	173	$	342	$	-	$	-	$	32,168	$	138,475	$	1,121	$	139,596	$	171,764
Commercial real estate		264,693		1,641		10,328		-		-		276,662		-		-		-		276,662
Construction, land acquisition and development		42,767		-		-		-		-		42,767		1,162		-		1,162		43,929
Commercial and industrial		155,223		612		1,358		-		-		157,193		4,430		31		4,461		161,654
Consumer		3,135		-		-		-		-		3,135		125,447		610		126,057		129,192
State and political subdivisions		49,953		-		-		-		-		49,953		-		-		-		49,953
Total	$	547,424	$	2,426	$	12,028	$	-	$	-	$	561,878	$	269,514	$	1,762	$	271,276	$	833,154

	Credit Quality Indicators
	December 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	$	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	$	-	$	-	$	546,961	$	277,413	$	1,982	$	279,395	$	826,356

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

$8.6

 million and

$9.1

 million at

March 31, 2020

and 

December 31, 2019

,

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

March 31, 2020

and 

December 31, 2019

.

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

March 31, 2020

and 

December 31, 2019

:

	March 31, 2020
	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	$	169,878	$	464	$	-	$	-	$	170,342
Commercial real estate		271,197		43		-		-		271,240
Construction, land acquisition and development		43,929		-		-		-		43,929
Commercial and industrial		160,057		249		226		-		160,532
Consumer		126,363		1,719		500		-		128,582
State and political subdivisions		49,953		-		-		-		49,953
Total performing (accruing) loans		821,377		2,475		726		-		824,578
Non-accrual loans:
Residential real estate		622		223		14		563		1,422
Commercial real estate		2,434		-		-		2,988		5,422
Construction, land acquisition and development		-		-		-		-		-
Commercial and industrial		868		-		-		254		1,122
Consumer		213		18		170		209		610
State and political subdivisions		-		-		-		-		-
Total non-accrual loans		4,137		241		184		4,014		8,576
Total loans receivable	$	825,514	$	2,716	$	910	$	4,014	$	833,154

	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

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

March 31, 2020

and 

December 31, 2019

.

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

$1.2

million at

March 31, 2020

and

$1.0

 million at

December 31, 2019

.

	March 31, 2020
			Unpaid
	Recorded		Principal		Related
(in thousands)	Investment		Balance		Allowance
With no allowance recorded:
Residential real estate	$	1,066	$	1,154	$	-
Commercial real estate		4,463		5,974		-
Construction, land acquisition and development		74		74		-
Commercial and industrial		453		675		-
Consumer		22		25		-
State and political subdivisions		-		-		-
Total impaired loans with no related allowance recorded		6,078		7,902		-
With a related allowance recorded:
Residential real estate		1,492		1,492		8
Commercial real estate		6,846		7,565		205
Construction, land acquisition and development		-		-		-
Commercial and industrial		539		551		209
Consumer		170		170		1
State and political subdivisions		-		-		-
Total impaired loans with a related allowance recorded		9,047		9,778		423
Total impaired loans:
Residential real estate		2,558		2,646		8
Commercial real estate		11,309		13,539		205
Construction, land acquisition and development		74		74		-
Commercial and industrial		992		1,226		209
Consumer		192		195		1
State and political subdivisions		-		-		-
Total impaired loans	$	15,125	$	17,680	$	423

	December 31, 2019
			Unpaid
	Recorded		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 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

The following table presents the average balance and interest income by loan category recognized on impaired loans for the

three

months ended

March 31, 2020

and

2019

:

	Three Months Ended March 31,
	2020				2019
	Average		Interest		Average		Interest
(in thousands)	Balance		Income (1)		Balance		Income (1)
Residential real estate	$	2,569	$	20	$	1,839	$	21
Commercial real estate		11,321		68		9,630		77
Construction, land acquisition and development		75		1		82		1
Commercial and industrial		1,014		-		1,047		-
Consumer		193		2		380		5
State and political subdivisions		-		-		-		-
Total impaired loans	$	15,172	$	91	$	12,978	$	104

(

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

$111

 thousand for the

three

months ended

March 31, 2020

and

$82

thousand for the

three

months ended

March 31, 2019.

Troubled Debt Restructured Loans

TDRs at

March 31, 2020

and 

December 31, 2019 

were

$9.0

 million and

$9.1

 million, respectively. Accruing and non-accruing TDRs were

$7.7

 million and

$1.3

 million, respectively, at

March 31, 2020,

and

$7.7

 million and

$1.4

 million, respectively, at

December 31, 2019.

Approximately

$65

 thousand and 

$97

thousand in specific reserves have been established for TDRs as of

March 31, 2020

and 

December 31, 2019,

respectively. FNCB was

not

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

March 31, 2020.

The modification of the terms of loans classified as TDRs 

may

include

one

or a combination of the following changes, 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

no

loans modified as a TDR during the

three

months ended

March 31, 2020

and

2019.

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

three

months ended

March 31, 2020

and

2019

.

Modifications Related to COVID-

19

In late

March 2020,

the federal banking regulators issued guidance that modifications made to a borrower affected by the COVID-

19

pandemic and governmental shutdown orders does

not

need to be identified as a TDR if the loan was current at the time a modification plan was implemented. Section

4013

of the CARES Act also addressed COVID-

19

-related modifications and specified that such modifications made on loans that were current as of

December 31, 2019

are

not

TDRs. As of

March 31, 2020,

FNCB has applied this guidance and made

266

such modifications with principal balances totaling

$88.0

million. More of these types of modifications are likely to be executed in the

second

quarter of

2020

and FNCB will continue to follow the guidance issued by the banking regulators in making any TDR determinations.

Residential Real Estate Loan Foreclosures

There were

no

residential real estate properties foreclosed

 upon during the

three

months ended

March 31, 2020

or included in OREO at

March 31, 2020

. 

There were

three

consumer mortgage loans secured by residential real estate properties in the process of foreclosure at

March 31, 2019.

There was

no

 aggregate recorded investment to FNCB for these

three

loans at

March 31, 2019

.  The balance of

one

loan was previously charged-off in its entirety and

two

loans were sold to an investor on the secondary market. For the

three

months ended

March 31, 2019

, there were

no

residential real estate properties foreclosed upon, and there was

one

 residential real estate property with a carrying value of

$45

 thousand included in OREO at

March 31, 2019

.