UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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.
FNCB BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
| | | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| | | |
| (Address of Principal Executive Offices) | (Zip Code) |
(
Registrant’s telephone number, including area code
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| |
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.
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).
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 ☐ | |
| | 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
Part I - Financial Information
| CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION |
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| (unaudited) |
| June 30, | December 31, | |||||||
| (in thousands, except share data) | 2021 | 2020 | ||||||
| Assets | ||||||||
| Cash and cash equivalents: | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits in other banks | ||||||||
| Total cash and cash equivalents | ||||||||
| Available-for-sale debt securities, at fair value | ||||||||
| Equity securities, at fair value | ||||||||
| Restricted stock, at cost | ||||||||
| Loans held for sale | ||||||||
| Loans, net of allowance for loan and lease losses of $ and $ | ||||||||
| Bank premises and equipment, net | ||||||||
| Accrued interest receivable | ||||||||
| Bank-owned life insurance | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Deposits: | ||||||||
| Demand (non-interest-bearing) | $ | $ | ||||||
| Interest-bearing | ||||||||
| Total deposits | ||||||||
| Borrowed funds | ||||||||
| Accrued interest payable | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders' equity | ||||||||
| Preferred shares ($ par) | ||||||||
| Authorized: shares at June 30, 2021 and December 31, 2020 | ||||||||
| Issued and outstanding: shares at June 30, 2021 and December 31, 2020 | ||||||||
| Common shares ($ par) | ||||||||
| Authorized: shares at June 30, 2021 and December 31, 2020 | ||||||||
| Issued and outstanding: shares at June 30, 2021 and shares at December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
| CONSOLIDATED STATEMENTS OF INCOME |
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| (unaudited) |
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| (in thousands, except share data) |
2021 |
2020 |
2021 |
2020 |
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| Interest income |
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| Interest and fees on loans |
$ | $ | $ | $ | ||||||||||||
| Interest and dividends on securities: |
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| Taxable |
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| Tax-exempt |
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| Dividends |
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| Total interest and dividends on securities |
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| Interest on interest-bearing deposits in other banks |
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| Total interest income |
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| Interest expense |
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| Interest on deposits |
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| Interest on borrowed funds: |
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| Federal Reserve Bank Discount Window advances |
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| Federal Home Loan Bank of Pittsburgh advances |
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| Junior subordinated debentures |
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| Total interest on borrowed funds |
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| Total interest expense |
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| Net interest income before provision for loan and lease losses |
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| Provision for loan and lease losses |
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| Net interest income after provision for loan and lease losses |
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| Non-interest income |
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| Deposit service charges |
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| Net gain on the sale of available-for-sale debt securities |
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| Net gain on equity securities |
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| Net gain on the sale of mortgage loans held for sale |
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| Loan-related fees |
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| Income from bank-owned life insurance |
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| Bank-owned life insurance settlement |
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| Loan referral fees |
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| Merchant services revenue |
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| Other |
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| Total non-interest income |
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| Non-interest expense |
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| Salaries and employee benefits |
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| Occupancy expense |
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| Equipment expense |
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| Advertising expense |
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| Data processing expense |
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| Regulatory assessments |
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| Bank shares tax |
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| Professional fees |
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| Insurance expense |
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| Other operating expenses |
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| Total non-interest expense |
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| Income before income tax expense |
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| Income tax expense |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Earnings per share |
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| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
| Cash dividends declared per common share |
$ | $ | $ | $ | ||||||||||||
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |
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| Basic |
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| Diluted |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
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| (unaudited) |
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| (in thousands) |
2021 |
2020 |
2021 |
2020 |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): |
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| Unrealized gains (losses) on available-for-sale debt securities |
( |
) | ||||||||||||||
| Taxes |
( |
) | ( |
) | ( |
) | ||||||||||
| Net of tax amount |
( |
) | ||||||||||||||
| Reclassification adjustment for gains included in net income |
( |
) | ( |
) | ( |
) | ||||||||||
| Taxes |
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| Net of tax amount |
( |
) | ( |
) | ( |
) | ||||||||||
| Derivative adjustments |
( |
) | ( |
) | ( |
) | ||||||||||
| Taxes |
( |
) | ||||||||||||||
| Net of tax amount |
( |
) | ( |
) | ( |
) | ||||||||||
| Total other comprehensive income (loss) |
( |
) | ||||||||||||||
| Comprehensive income |
$ | $ | $ | $ | ||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
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| For the Three and Six Months Ended June 30, 2021 and 2020 |
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| (unaudited) |
| (in thousands, except per share data) | Number of Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total Shareholders' Equity | ||||||||||||||||||
| For the three months ended: | ||||||||||||||||||||||||
| Balances, March 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||
| Cash dividends paid, $ per share | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted stock awards | - | |||||||||||||||||||||||
| Common shares issued under long-term incentive compensation plan | ( | ) | ||||||||||||||||||||||
| Common shares issued through dividend reinvestment/optional cash purchase plan | ( | ) | ||||||||||||||||||||||
| Other comprehensive income, net of tax of $ | - | |||||||||||||||||||||||
| Balances, June 30, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Balances, March 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||
| Cash dividends paid, $ per share | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted stock awards | - | |||||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Common shares issued under long-term incentive compensation plan | ( | ) | ||||||||||||||||||||||
| Common shares issued through dividend reinvestment/optional cash purchase plan | ( | ) | ||||||||||||||||||||||
| Other comprehensive income, net of tax of $ | - | |||||||||||||||||||||||
| Balances, June 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||
| For the six months ended: | ||||||||||||||||||||||||
| Balances, December 31, 2019 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||
| Cash dividends paid, $ per share | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted stock awards | - | |||||||||||||||||||||||
| Common shares issued under long-term incentive compensation plan | ( | ) | ||||||||||||||||||||||
| Common shares issued through dividend reinvestment/optional cash purchase plan | ( | ) | ||||||||||||||||||||||
| Other comprehensive income, net of tax of $ | - | |||||||||||||||||||||||
| Balances, June 30, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Balances, December 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Net income for the period | - | |||||||||||||||||||||||
| Cash dividends paid, $ per share | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted stock awards | - | |||||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Common shares issued under long-term incentive compensation plan | ( | ) | ||||||||||||||||||||||
| Common shares issued through dividend reinvestment/optional cash purchase plan | ( | ) | ||||||||||||||||||||||
| Other comprehensive loss, net of tax of $ | - | ( | ) | ( | ) | |||||||||||||||||||
| Balances, June 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
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| (unaudited) |
| Six Months Ended June 30, |
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| (in thousands) |
2021 |
2020 |
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| Cash flows from operating activities: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Investment securities amortization, net |
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| Equity in trust |
( |
) | ( |
) | ||||
| Depreciation of bank premises and equipment |
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| Amortization of loan origination (fees) costs |
( |
) | ||||||
| Valuation adjustment for loan servicing rights |
( |
) | ||||||
| Stock-based compensation expense |
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| Provision for loan and lease losses |
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| Valuation adjustment for other real estate owned |
( |
) | ||||||
| Valuation adjustment for off-balance sheet commitments |
( |
) | ( |
) | ||||
| Net gain on the sale of available-for-sale debt securities |
( |
) | ( |
) | ||||
| Net gain on equity securities |
( |
) | ( |
) | ||||
| Net gain on the sale of mortgage loans held for sale |
( |
) | ( |
) | ||||
| Bank-owned life insurance settlement |
( |
) | ||||||
| Income from bank-owned life insurance |
( |
) | ( |
) | ||||
| Proceeds from the sale of mortgage loans held for sale |
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| Funds used to originate mortgage loans held for sale |
( |
) | ( |
) | ||||
| Decrease in net deferred tax assets |
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| Increase in accrued interest receivable |
( |
) | ( |
) | ||||
| Decrease in other assets |
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| Decrease in accrued interest payable |
( |
) | ( |
) | ||||
| (Decrease) increase in other liabilities |
( |
) | ||||||
| Total adjustments |
( |
) | ||||||
| Net cash provided by operating activities |
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| Cash flows from investing activities: |
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| Maturities, calls and principal payments of available-for-sale debt securities |
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| Proceeds from the sale of available-for-sale debt securities |
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| Purchases of available-for-sale debt securities |
( |
) | ( |
) | ||||
| Purchases of equity securities |
( |
) | ||||||
| Redemption of the stock in Federal Home Loan Bank of Pittsburgh |
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| Net increase in loans to customers |
( |
) | ( |
) | ||||
| Proceeds from the sale of other real estate owned |
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| Proceeds from bank-owned life insurance settlement |
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| Purchase of bank-owned life insurance |
( |
) | ||||||
| Purchases of bank premises and equipment |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities: |
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| Net increase in deposits |
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| Repayments of Federal Home Loan Bank of Pittsburgh advances - overnight |
( |
) | ||||||
| Proceeds from Federal Home Loan Bank of Pittsburgh advances - term |
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| Repayment of Federal Home loan Bank of Pittsburgh advances - term |
( |
) | ||||||
| Proceeds from Federal Reserve Bank Discount Window advances |
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| Repayment of Federal Reserve Bank Discount Window advances |
( |
) | ||||||
| Repurchase of common shares |
( |
) | ||||||
| Proceeds from issuance of common shares, net of discount |
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| Cash dividends paid |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
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| Net (decrease) increase in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental cash flow information |
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| Cash paid during the period for: |
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| Interest |
$ | $ | ||||||
| Taxes |
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| Other transactions: |
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| Loans transferred to OREO |
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| Available-for-sale debt securities purchased, not settled |
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| Lease liabilities arising from obtaining right-of-use assets |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
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 and six months ended June 30, 2021 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, 2020.
Note 2. New Authoritative Accounting Guidance
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. ASU 2016-13 is commonly referred to as Current Expected Credit Losses ("CECL") and will require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income, including such financial assets as loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. On June 17, 2016, the four federal financial institution regulatory agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency), issued a joint statement to provide information about ASU 2016-13 and the initial supervisory views regarding the implementation of the new standard. The joint statement applies to all banks, savings associations, credit unions and financial institution holding companies, regardless of asset size. The statement details the key elements of, and the steps necessary for, the successful transition to the new accounting standard. In addition, the statement notifies financial institutions that because the appropriate allowance levels are institution-specific amounts, the agencies will not establish benchmark targets or ranges for the change in institutions’ allowance levels upon adoption of the ASU, or for allowance levels going forward. Due to the importance of ASU 2016-13, the agencies encourage financial institutions to begin planning and preparing for the transition and state that senior management, under the oversight of the board of directors, should work closely with staff in their accounting, lending, credit risk management, internal audit, and information technology functions during the transition period leading up to, and well after, adoption. ASU 2016-13 was originally effective for public business entities that are registered with the U.S. Securities and Exchange Commission (“SEC”) under the Securities and Exchange Act of 1934, as amended, including smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On November 15, 2019, the FASB issued ASU 2019-10, "Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates," which finalized various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies. Specifically, under ASU 2019-10, the effective date for implementation of CECL for smaller reporting companies, private companies and not-for-profits was extended to fiscal years, and interim periods within those years, beginning after December 15, 2022. FNCB is a smaller reporting company, and accordingly, will adopt this guidance on January 1, 2023. FNCB has a CECL task group comprised of members of its finance, credit administration, lending, internal audit, loan operations and information systems units. The CECL task group understands the provisions of ASU 2016-13 and is currently in the process of implementing the new guidance, which includes, but is not limited to: (1) identifying segments and sub-segments within the loan portfolio that have similar risk characteristics; (2) determining the appropriate methodology for each segment; (3) implementing changes that are necessary to its core operating system and interfaces to be able to capture appropriate data requirements; and (4) evaluating qualitative factors and economic to develop appropriate forecasts for integration into the model. FNCB is currently evaluating the effect this guidance may have on its operating results and/or financial position, including assessing any potential impact on its capital.
Refer to Note 2 to FNCB’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 Annual Report") for a discussion of additional accounting guidance applicable to FNCB that will be adopted in future periods.
Note 3. Securities
Debt Securities
The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s available-for-sale debt securities at June 30, 2021 and December 31, 2020:
| June 30, 2021 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | |||||||||||||||
| Amortized | Holding | Holding | Fair | |||||||||||||
| (in thousands) | Cost | Gains | Losses | Value | ||||||||||||
| Available-for-sale debt securities: | ||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | ||||||||||||
| Obligations of state and political subdivisions | ||||||||||||||||
| U.S. government/government-sponsored agencies: | ||||||||||||||||
| Collateralized mortgage obligations - residential | ||||||||||||||||
| Collateralized mortgage obligations - commercial | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Private collateralized mortgage obligations | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| Asset-backed securities | ||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | ||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| U.S. government/government-sponsored agencies: | ||||||||||||||||
| Collateralized mortgage obligations - residential | ||||||||||||||||
| Collateralized mortgage obligations - commercial | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Private collateralized mortgage obligations | ||||||||||||||||
| Corporate debt securities | ||||||||||||||||
| Asset-backed securities | ||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | $ | ||||||||||||
Except for securities of U.S. government and government-sponsored agencies, there were securities of any individual issuer that exceeded 10.0% of shareholders’ equity at June 30, 2021 and December 31, 2020.
Securities with carrying amounts of $
The following table presents the maturity information of FNCB’s available-for-sale debt securities at June 30, 2021. Expected maturities will differ from contractual maturities 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.
| June 30, 2021 | ||||||||
| Amortized | Fair | |||||||
| (in thousands) | Cost | Value | ||||||
| Amounts maturing in: | ||||||||
| One year or less | $ | $ | ||||||
| After one year through five years | ||||||||
| After five years through ten years | ||||||||
| After ten years | ||||||||
| Mortgage-backed securities | ||||||||
| Collateralized mortgage obligations | ||||||||
| Asset-backed securities | ||||||||
| Total available-for-sale debt securities | $ | $ | ||||||
The following table presents the gross proceeds received and gross realized gains and losses on sales of available-for-sale debt securities for the three and six months ended June 30, 2021 and 2020.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Available-for-sale debt securities: | ||||||||||||||||
| Gross proceeds received on sales | $ | $ | $ | $ | ||||||||||||
| Gross realized gains | ||||||||||||||||
| Gross realized losses | ( | ) | ( | ) | ||||||||||||
The following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities with unrealized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time the securities have been in an unrealized loss position.
| June 30, 2021 | ||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Obligations of state and political subdivisions | ||||||||||||||||||||||||||||||||||||
| U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations - residential | ||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations - commercial | ||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||||||||||||
| Private collateralized mortgage obligations | ||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||
| 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 political subdivisions | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations - residential | ||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations - commercial | ||||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||||||||||||||
| Private collateralized mortgage obligations | ||||||||||||||||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
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 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.
Management performed a review of all securities in an unrealized loss position as of June 30, 2021 and determined that changes in the fair values of the securities were consistent with movements in market interest rates and spreads or general market conditions. 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 June 30, 2021. 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 June 30, 2021
Equity Securities
Included in equity securities with readily determinable fair values at June 30, 2021 and December 31, 2020 were investments in the common or preferred stock of publicly traded bank holding companies and an investment in a mutual fund comprised of 1-4 family residential mortgage-backed securities collateralized by properties within FNCB’s market area. Equity securities had a cost basis and fair value of $
The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the three and six months ended June 30, 2021 and 2020.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net gains recognized on equity securities | $ | $ | $ | $ | ||||||||||||
| Less: net gains recognized on equity securities sold or transferred | ||||||||||||||||
| Unrealized gains on equity securities held | $ | $ | $ | $ | ||||||||||||
Equity Securities without Readily Determinable Fair Values
At June 30, 2021 and December 31, 2020, equity securities without readily determinable fair values consisted of a $
Restricted Securities
The following table presents FNCB's investment in restricted stock at June 30, 2021 and December 31, 2020. Restricted stock has limited marketability and is carried at cost.
| June 30, | December 31, | |||||||
| (in thousands) | 2021 | 2020 | ||||||
| Stock in Federal Home Loan Bank of Pittsburgh | $ | $ | ||||||
| Stock in Atlantic Community Banker's Bank | ||||||||
| Total restricted securities, at cost | $ | $ | ||||||
Management noted no indicators of impairment for the Federal Home Loan Bank of Pittsburgh or Atlantic Community Banker’s Bank stock at June 30, 2021 and December 31, 2020.
Note 4. Loans
The following table summarizes loans receivable, net, by category at June 30, 2021 and December 31, 2020:
| June 30, | December 31, | |||||||
| (in thousands) | 2021 | 2020 | ||||||
| Residential real estate | $ | $ | ||||||
| Commercial real estate | ||||||||
| Construction, land acquisition and development | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| State and political subdivisions | ||||||||
| Total loans, gross | ||||||||
| Unearned income | ( | ) | ( | ) | ||||
| Net deferred loan fees | ( | ) | ( | ) | ||||
| Allowance for loan and lease losses | ( | ) | ( | ) | ||||
| Loans, net | $ | $ | ||||||
Included in commercial and industrial loans at June 30, 2021 and December 31, 2020 were $
FNCB has granted loans, letters of credit and lines of credit to certain of its executive officers and directors as well as to certain of their related parties. For more information about related party transactions, refer to Note 6, “Related Party Transactions” to these consolidated financial statements.
FNCB originates 1-4 family mortgage loans for sale in the secondary market. During the three and six months ended June 30, 2021, the principal balance of 1-4 family mortgages sold on the secondary market were $
The unpaid principal balance of loans serviced for others, which includes residential mortgages and SBA-guaranteed loans, was $
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 six months ended June 30, 2021. Refer to Note 2, “Summary of Significant Accounting Policies” to FNCB’s consolidated financial statements included in the 2020 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. However, 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. Management continues to monitor the loan portfolio for any potential adverse impact to asset quality related to the COVID-19 pandemic. While management uses the best information available to make its evaluations, future adjustments to the ALLL may be necessary if conditions differ substantially from the information used in making the evaluations. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL.
The following table summarizes activity in the ALLL by loan category for the three and six months ended June 30, 2021 and 2020.
| 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 June 30, 2021 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance, April 1, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance, June 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Three months ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance, April 1, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance, June 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six months ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance, January 1, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance, June 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six months ended June 30, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Beginning balance, January 1, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provisions (credits) | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance, June 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following table presents, by loan category, the allocation of the ALLL and the related loan balance disaggregated based on the impairment methodology at June 30, 2021 and December 31, 2020:
| Construction, | ||||||||||||||||||||||||||||||||
| Land | State and | |||||||||||||||||||||||||||||||
| Residential | Commercial | Acquisition and | Commercial | Political | ||||||||||||||||||||||||||||
| (in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
| June 30, 2021 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans receivable: | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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, commercial and municipal indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that are delinquent
The following tables present the recorded investment in loans receivable by loan category and credit quality indicator at June 30, 2021 and December 31, 2020:
| Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
| June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||||||
| Construction, land acquisition and development | ||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||||
| State and political subdivisions | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
| December 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 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||||||
| Construction, land acquisition and development | ||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||||
| State and political subdivisions | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
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 $
The following tables present the delinquency status of past due and non-accrual loans at June 30, 2021 and December 31, 2020:
| June 30, 2021 | ||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | |||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Construction, land acquisition and development | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| State and political subdivisions | ||||||||||||||||||||
| Total performing (accruing) loans | ||||||||||||||||||||
| Non-accrual loans: | ||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Construction, land acquisition and development | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| State and political subdivisions | ||||||||||||||||||||
| Total non-accrual loans | ||||||||||||||||||||
| Total loans receivable | $ | $ | $ | $ | $ | |||||||||||||||
| December 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 | $ | $ | $ | $ | $ | |||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Construction, land acquisition and development | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| State and political subdivisions | ||||||||||||||||||||
| Total performing (accruing) loans | ||||||||||||||||||||
| Non-accrual loans: | ||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||
| Construction, land acquisition and development | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Consumer | ||||||||||||||||||||
| State and political subdivisions | ||||||||||||||||||||
| Total non-accrual loans | ||||||||||||||||||||
| Total loans receivable | $ | $ | $ | $ | $ | |||||||||||||||
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 June 30, 2021 and December 31, 2020. Non-accrual loans, other than TDRs, with balances less than the 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 $
| June 30, 2021 | ||||||||||||
| Unpaid | ||||||||||||
| Recorded | Principal | Related | ||||||||||
| (in thousands) | Investment | Balance | Allowance | |||||||||
| With no allowance recorded: | ||||||||||||
| Residential real estate | $ | $ | $ | - | ||||||||
| Commercial real estate | - | |||||||||||
| Construction, land acquisition and development | - | |||||||||||
| Commercial and industrial | - | |||||||||||
| Consumer | - | |||||||||||
| State and political subdivisions | - | |||||||||||
| Total impaired loans with no related allowance recorded | - | |||||||||||
| With a related allowance recorded: | ||||||||||||
| Residential real estate | ||||||||||||
| Commercial real estate | ||||||||||||
| Construction, land acquisition and development | ||||||||||||
| Commercial and industrial | ||||||||||||
| Consumer | ||||||||||||
| State and political subdivisions | ||||||||||||
| Total impaired loans with a related allowance recorded | ||||||||||||
| Total impaired loans: | ||||||||||||
| Residential real estate | ||||||||||||
| Commercial real estate | ||||||||||||
| Construction, land acquisition and development | ||||||||||||
| Commercial and industrial | ||||||||||||
| Consumer | ||||||||||||
| State and political subdivisions | ||||||||||||
| Total impaired loans | $ | $ | $ | |||||||||
| December 31, 2020 | ||||||||||||
| Unpaid | ||||||||||||
| Recorded | Principal | Related | ||||||||||
| (in thousands) | Investment | Balance | Allowance | |||||||||
| With no allowance recorded: | ||||||||||||
| Residential real estate | $ | $ | $ | - | ||||||||
| Commercial real estate | - | |||||||||||
| Construction, land acquisition and development | - | |||||||||||
| Commercial and industrial | - | |||||||||||
| Consumer | - | |||||||||||
| State and political subdivisions | - | |||||||||||
| Total impaired loans with no related allowance recorded | - | |||||||||||
| With a related allowance recorded: | ||||||||||||
| Residential real estate | ||||||||||||
| Commercial real estate | ||||||||||||
| Construction, land acquisition and development | ||||||||||||
| Commercial and industrial | ||||||||||||
| Consumer | ||||||||||||
| State and political subdivisions | ||||||||||||
| Total impaired loans with a related allowance recorded | ||||||||||||
| Total impaired loans: | ||||||||||||
| Residential real estate | ||||||||||||
| Commercial real estate | ||||||||||||
| Construction, land acquisition and development | ||||||||||||
| Commercial and industrial | ||||||||||||
| Consumer | ||||||||||||
| State and political subdivisions | ||||||||||||
| Total impaired loans | $ | $ | $ | |||||||||
The following table presents the average balance and interest income by loan category recognized on impaired loans for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Average | Interest | Average | Interest | Average | Interest | Average | Interest | |||||||||||||||||||||||||
| (in thousands) | Balance | Income (1) | Balance | Income (1) | Balance | Income (1) | Balance | Income (1) | ||||||||||||||||||||||||
| Residential real estate | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||
| Construction, land acquisition and development | ||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| State and political subdivisions | ||||||||||||||||||||||||||||||||
| Total impaired loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| (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 $
Troubled Debt Restructured Loans
TDRs were $
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
Residential Real Estate Loan Foreclosures
During the three and six months ended June 30, 2021, FNCB obtained a deed in lieu of foreclosure for a residential mortgage with a recorded investment of $
There were
Note 5. Income Taxes
The following table presents a reconciliation between the effective income tax expense and the income tax expense that would have been provided at the federal statutory tax rate of
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
| Provision at statutory tax rates | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| Add (deduct): | ||||||||||||||||||||||||||||||||
| Tax effects of tax free interest income | ( | ) | ( | )% | ( | ) | ( | )% | ( | ) | ( | )% | ( | ) | ( | )% | ||||||||||||||||
| Non-deductible interest expense | % | % | % | % | ||||||||||||||||||||||||||||
| Bank-owned life insurance | ( | ) | ( | )% | ( | ) | ( | )% | ( | ) | ( | )% | ( | ) | ( | )% | ||||||||||||||||
| Gains on equity securities | ( | ) | ( | )% | ( | ) | ( | )% | ||||||||||||||||||||||||
| Other items, net | % | ( | ) | ( | )% | ( | ) | ( | )% | % | ||||||||||||||||||||||
| Income tax provision | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently if necessary, in accordance with guidance set forth in ASC Topic 740 “Income Taxes,” and applies the criteria in the guidance to determine whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. Management performed an evaluation of FNCB’s deferred tax assets at June 30, 2021 taking into consideration all available positive and negative evidence at that time. Based on this evaluation, management believes that FNCB’s future taxable income will be sufficient to utilize its deferred tax assets. There was
Note 6. Related Party Transactions
In conducting its business, FNCB has engaged in, and intends to continue to engage in, banking and financial transactions with directors, executive officers and their related parties.
FNCB has granted loans, letters of credit and lines of credit to directors, executive officers and their related parties. The following table summarizes the changes in the total amounts of such outstanding loans, advances under lines of credit, net of any participations sold, as well as repayments during the three and six months ended June 30, 2021 and 2020.
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| (in thousands) |
2021 |
2020 |
2021 |
2020 |
||||||||||||
| Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
| Additions, new loans and advances |
||||||||||||||||
| Repayments |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other (1) |
( |
) | ( |
) | ||||||||||||
| Balance, end of period |
$ | $ | $ | $ | ||||||||||||
| (1) Other represents loans to related parties that ceased being related parties during the year |
||||||||||||||||
At June 30, 2021 there were
Deposits from directors, executive officers and their related parties held by the Bank at June 30, 2021 and December 31, 2020 amounted to $
In the course of its operations, FNCB acquires goods and services from, and transacts business with, various companies of related parties, which include, but are not limited to, employee health insurance, fidelity bond and errors and omissions insurance, legal services, rent and repair of repossessed automobiles for resale. FNCB recorded payments to related parties for goods and services of $
Note 7. Commitments and Contingencies
Leases
FNCB is obligated under operating leases for certain bank branches, office space, automobiles and equipment. Operating lease right of use ("ROU") assets represent FNCB's right to use an underlying asset during the lease term and operating liabilities represent FNCB's obligation to make lease payments under the lease agreement. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents FNCB's incremental borrowing rate at the commencement date. ROU assets are included in other assets and operating lease liabilities are included in other liabilities in the consolidated statements of financial condition. As of June 30, 2021, ROU assets and lease liabilities were $
Operating lease expense associated with bank branches and office space is included in occupancy expense, while operating lease expenses associated with automobiles and office equipment are included in equipment expense in the consolidated statements of income. Total rental expense under leases amounted to $
The following table summarizes the maturity of remaining operating lease liabilities as of June 30, 2021:
| (in thousands) |
June 30, 2021 |
|||
| 2021 |
$ | |||
| 2022 |
||||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 and thereafter |
||||
| Total lease payments |
||||
| Less: imputed interest |
||||
| Present value of operating lease liabilities |
$ | |||
The following table presents other information related to our operating leases:
| (dollars in thousands) |
June 30, 2021 |
|||
| Weighted-average remaining lease term |
|
|||
| Weighted-average discount rate |
% | |||
| Cash paid for amounts included in the measurement of lease liabilities: |
||||
| Operating cash flows from operating leases |
$ | |||
Litigation
FNCB has been subject to tax audits, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims, workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of FNCB.
Note 8. Stock Compensation Plans/Subsequent Event
FNCB has a Long-Term Incentive Compensation Plan (“LTIP”) for directors, executives and key employees. The LTIP authorizes up to
Subsequent to June 30, 2021, on July 1, 2021,
The following table summarizes the activity related to FNCB’s unvested restricted stock awards during the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||||||
| Weighted- |
Weighted- |
Weighted- |
Weighted- |
|||||||||||||||||||||||||||||
| Average |
Average |
Average |
Average |
|||||||||||||||||||||||||||||
| Restricted |
Grant Date |
Restricted |
Grant Date |
Restricted |
Grant Date |
Restricted |
Grant Date |
|||||||||||||||||||||||||
| (dollars in thousands) |
Shares |
Fair Value |
Shares |
Fair Value |
Shares |
Fair Value |
Shares |
Fair Value |
||||||||||||||||||||||||
| Unvested restricted stock awards: |
||||||||||||||||||||||||||||||||
| Total outstanding, beginning of period |
$ | $ | $ | $ | ||||||||||||||||||||||||||||
| Awards granted |
||||||||||||||||||||||||||||||||
| Forfeitures |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Vestings |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
| Total outstanding, end of period |
$ | $ | $ | $ | ||||||||||||||||||||||||||||
Note 9. Regulatory Matters/Subsequent Events
FNCB’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to FNCB. Bank regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. For the three and six months ended June 30, 2021 cash dividends declared and paid by FNCB were $
On January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program under which up to
The holding company is considered a small bank holding company and is exempt from risk-based capital and leverage rules, including Basel III. FNCB and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on FNCB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FNCB and the Bank must meet specific capital guidelines that involve quantitative measures of FNCB's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. FNCB's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of June 30, 2021 and December 31, 2020, that FNCB and the Bank meet all applicable capital adequacy requirements.
Current quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Total capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). The following tables present summary information regarding the Bank’s risk-based capital and related ratios at June 30, 2021 and December 31, 2020:
| FNCB Bank | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations | |||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||
| June 30, 2021 | ||||||||||||||||||||
| Total capital (to risk-weighted assets) | $ | % | % | % | % | |||||||||||||||
| Tier I capital (to risk-weighted assets) | % | % | % | % | ||||||||||||||||
| Tier I common equity (to risk-weighted assets) | % | % | % | % | ||||||||||||||||
| Tier I capital (to average assets) | % | % | % | % | ||||||||||||||||
| Total risk-weighted assets | ||||||||||||||||||||
| Total average assets | ||||||||||||||||||||
| FNCB Bank | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations | |||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Total capital (to risk-weighted assets) | $ | % | % | % | % | |||||||||||||||
| Tier I capital (to risk-weighted assets) | % | % | % | % | ||||||||||||||||
| Tier I common equity (to risk-weighted assets) | % | % | % | % | ||||||||||||||||
| Tier I capital (to average assets) | % | % | % | % | ||||||||||||||||
| Total risk-weighted assets | ||||||||||||||||||||
| Total average assets | ||||||||||||||||||||
Note 10. Fair Value Measurements
In determining fair value, FNCB uses various valuation approaches, including market, income and cost approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of FNCB. Unobservable inputs reflect FNCB’s knowledge about the assumptions the market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). A financial asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
| ● |
Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets; |
| ● |
Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data; and |
| ● |
Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value. |
A description of the valuation methodologies used for assets recorded at fair value is set forth below.
Available-for-Sale Debt Securities
The estimated fair values for FNCB’s investments in obligations of U.S Treasury securities, U.S. government agencies, obligations of state and political subdivisions, government-sponsored agency CMOs and mortgage-backed securities, private collateralized mortgage obligations and asset-backed securities are obtained by FNCB from a nationally-recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing (Level 2 inputs), to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider observable data that may include, among other things, dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, and are based on market data obtained from sources independent from FNCB. The Level 2 investments in FNCB’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. Management has determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in FNCB’s portfolio are not exchange-traded, and such non-exchange-traded fixed income securities are typically priced by correlation to observed market data. FNCB has reviewed the pricing service’s methodology to confirm its understanding that such methodology results in a valuation based on quoted market prices for similar instruments traded in active markets, quoted markets for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which the significant assumptions can be corroborated by market data as appropriate to a Level 2 designation.
For those securities for which the inputs used by an independent pricing service were derived from unobservable market information, FNCB evaluated the appropriateness and quality of each price. Management reviewed the volume and level of activity for all classes of securities and attempted to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value (fair values based on Level 3 inputs). If applicable, the adjustment to fair value was derived based on present value cash flow model projections obtained from third party providers using assumptions similar to those incorporated by market participants.
At June 30, 2021, FNCB owned
Equity Securities
The estimated fair values of equity securities are determined by obtaining quoted prices on nationally recognized exchanges (Level 1 inputs).
Derivative Contracts
FNCB's derivative liabilities are reported at fair value utilizing Level 2 inputs. Values of these instruments are obtained through an independent pricing source utilizing information which may include market observed quotations for swaps, LIBOR rates, forward rates and rate volatility. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 2021, and December 31, 2020, and the fair value hierarchy of the respective valuation techniques utilized by FNCB to determine the fair value:
| Fair Value Measurements at June 30, 2021 |
||||||||||||||||
| Significant |
Significant |
|||||||||||||||
| Quoted Prices |
Other |
Other |
||||||||||||||
| in Active Markets |
Observable |
Unobservable |
||||||||||||||
| for Identical Assets |
Inputs |
Inputs |
||||||||||||||
| (in thousands) |
Fair Value |
(Level 1) |
(Level 2) |
(Level 3) |
||||||||||||
| Financial assets: |
||||||||||||||||
| Available-for-sale debt securities: |
||||||||||||||||
| U.S. Treasury securities |
$ | $ | $ | $ | ||||||||||||
| Obligations of state and political subdivisions |
||||||||||||||||
| U.S. government/government-sponsored agencies: |
||||||||||||||||
| Collateralized mortgage obligations - residential |
||||||||||||||||
| Collateralized mortgage obligations - commercial |
||||||||||||||||
| Mortgage-backed securities |
||||||||||||||||
| Private collateralized mortgage obligations |
||||||||||||||||
| Corporate debt securities |
||||||||||||||||
| Asset-backed securities |
||||||||||||||||
| Subtotal available-for-sale debt securities |
||||||||||||||||
| Equity securities, at fair value |
||||||||||||||||
| Derivative assets |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| Financial liabilities: |
||||||||||||||||
| Derivative liabilities |
$ | $ | $ | $ | ||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| Fair Value Measurements at December 31, 2020 |
||||||||||||||||
| Significant |
Significant |
|||||||||||||||
| Quoted Prices |
Other |
Other |
||||||||||||||
| in Active Markets |
Observable |
Unobservable |
||||||||||||||
| for Identical Assets |
Inputs |
Inputs |
||||||||||||||
| (in thousands) |
Fair Value |
(Level 1) |
(Level 2) |
(Level 3) |
||||||||||||
| Financial assets: |
||||||||||||||||
| Available-for-sale debt securities: |
||||||||||||||||
| Obligations of state and political subdivisions |
$ | $ | $ | $ | ||||||||||||
| U.S. government/government-sponsored agencies: |
||||||||||||||||
| Collateralized mortgage obligations - residential |
||||||||||||||||
| Collateralized mortgage obligations - commercial |
||||||||||||||||
| Mortgage-backed securities |
||||||||||||||||
| Private collateralized mortgage obligations |
||||||||||||||||
| Corporate debt securities |
||||||||||||||||
| Asset-backed securities |
||||||||||||||||
| Subtotal available-for-sale debt securities |
||||||||||||||||
| Equity securities, at fair value |
||||||||||||||||
| Derivative assets |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| Financial liabilities: |
||||||||||||||||
| Derivative liabilities |
$ | $ | $ | $ | ||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
During the six months ended June 30, 2021, corporate debt securities were transferred from the Level 3 hierarchy to Level 2. Previously, the market for these securities was not active and management obtained fair values from an independent third party that utilized a discounted cash flow model. The market for these securities became active and beginning in the first quarter of 2021, management was able to obtain their fair values from the independent pricing service used to price the remainder of the portfolio. There were no transfers between levels within the fair value hierarchy during the six months ended June 30, 2020.
The following table presents a reconciliation and statement of operations classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which consisted entirely of corporate debt securities, for the six months ended June 30, 2021 and 2020.
| Fair Value Measurements |
||||||||
| Using Significant Unobservable Inputs (Level 3) |
||||||||
| Corporate Debt Securities |
||||||||
| For the Six Months Ended June 30, |
||||||||
| (in thousands) |
2021 |
2020 |
||||||
| Balance at January 1, |
$ | $ | ||||||
| Additions |
||||||||
| Redemptions |
||||||||
| Transfer to Level 2 |
( |
) | ||||||
| Sales |
||||||||
| Total gains or losses (realized/unrealized): |
||||||||
| Included in earnings |
||||||||
| Included in other comprehensive income |
( |
) | ||||||
| Balance at June 30, |
$ | $ | ||||||
Assets Measured at Fair Value on a Non-Recurring Basis
The following tables present assets and liabilities measured at fair value on a non-recurring basis at June 30, 2021 and December 31, 2020, and additional quantitative information about the valuation techniques and inputs utilized by FNCB to determine fair value. All assets were measured using Level 3 inputs.
| June 30, 2021 |
|||||||||||||||||||||
| Fair Value Measurement |
Quantitative Information |
||||||||||||||||||||
| Recorded |
Valuation |
Fair |
Valuation |
Unobservable |
Value/ |
||||||||||||||||
| (in thousands) |
Investment |
Allowance |
Value |
Technique |
Inputs |
Range |
|||||||||||||||
| Impaired loans - collateral dependent |
$ | $ | $ | Appraisal of collateral |
Selling cost |
% | |||||||||||||||
| Impaired loans - other |
Discounted cash flows |
Discount rate |
- | ||||||||||||||||||
| Other real estate owned |
( |
) | Appraisal of collateral |
Selling cost |
% | ||||||||||||||||
| December 31, 2020 |
|||||||||||||||||||||
| Fair Value Measurement |
Quantitative Information |
||||||||||||||||||||
| Recorded |
Valuation |
Fair |
Valuation |
Unobservable |
Value/ |
||||||||||||||||
| (in thousands) |
Investment |
Allowance |
Value |
Technique |
Inputs |
Range |
|||||||||||||||
| Impaired loans - collateral dependent |
$ | $ | $ | Appraisal of collateral |
Selling cost |
% | |||||||||||||||
| Impaired loans - other |
Discounted cash flows |
Discount rate |
|||||||||||||||||||
| Other real estate owned |
Appraisal of collateral |
Selling cost |
% | ||||||||||||||||||
The fair value of collateral-dependent impaired loans is determined through independent appraisals or other reasonable offers, which generally include various Level 3 inputs which are not identifiable. Management reduces the appraised value by the estimated costs to sell the property and may adjust the appraised values as necessary to consider any declines in real estate values since the time of the appraisal. For impaired loans that are not collateral-dependent, fair value is determined using the discounted cash flow method. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance or is charged off. The amount shown is the balance of impaired loans, net of any charge-offs and the related allowance for loan losses.
OREO properties are recorded at fair value less the estimated cost to sell at the date of FNCB’s acquisition of the property. Subsequent to acquisition of the property, the balance may be written down further. It is FNCB’s policy to obtain certified external appraisals of real estate collateral underlying impaired loans and OREO, and estimate fair value using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent and executed sale agreements.
The following table summarizes the estimated fair values of FNCB’s financial instruments using an exit price notion at June 30, 2021 and at December 31, 2020. FNCB discloses fair value information about financial instruments, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. The fair value of financial instruments that are not measured at fair value in the financial statements were based on the exit price notion. The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, management judgment is required to interpret data and develop fair value estimates. Accordingly, the estimates below are not necessarily indicative of the amounts FNCB could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
| Fair Value |
June 30, 2021 |
December 31, 2020 |
|||||||||||||||||
| (in thousands) |
Measurement |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
||||||||||||||
| Financial assets |
|||||||||||||||||||
| Cash and short term investments |
Level 1 |
$ | $ | $ | $ | ||||||||||||||
| Available-for-sale debt securities |
See table on page 21 |
||||||||||||||||||
| Equity securities |
Level 1 |
||||||||||||||||||
| Restricted stock |
Level 2 |
||||||||||||||||||
| Loans held for sale |
Level 2 |
||||||||||||||||||
| Loans, net |
Level 3 |
||||||||||||||||||
| Accrued interest receivable |
Level 2 |
||||||||||||||||||
| Equity securities without readily determinable fair values |
Level 3 |
||||||||||||||||||
| Servicing rights |
Level 3 |
||||||||||||||||||
| Derivative assets |
Level 2 |
||||||||||||||||||
| Financial liabilities |
|||||||||||||||||||
| Deposits |
Level 2 |
||||||||||||||||||
| Borrowed funds |
Level 2 |
||||||||||||||||||
| Accrued interest payable |
Level 2 |
||||||||||||||||||
| Derivative liabilities |
Level 2 |
||||||||||||||||||
Note 11. Earnings per Share
For FNCB, the numerator of both the basic and diluted earnings per share of common stock is net income available to common shareholders. The weighted-average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common share equivalents utilizing the treasury stock method. For the three and six months ended June 30, 2021 and 2020, common share equivalents consisted entirely of incremental shares of unvested restricted stock.
The following table presents the calculation of both basic and diluted earnings per share of common stock for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| (in thousands, except share data) |
2021 |
2020 |
2021 |
2020 |
||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Basic weighted-average number of common shares outstanding |
||||||||||||||||
| Plus: Common share equivalents |
||||||||||||||||
| Diluted weighted-average number of common shares outstanding |
||||||||||||||||
| Income per common share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
Note 12. Other Comprehensive Income
The following table summarizes the reclassifications out of accumulated other comprehensive income for the three and six months ended June 30, 2021 and 2020, comprised entirely of unrealized gains and losses on available-for-sale debt securities:
| For the Three Months Ended June 30, 2021 |
For the Six Months Ended June 30, 2021 |
|||||||||
| (in thousands) |
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Consolidated Statements of Income |
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Consolidated Statements of Income |
||||||
| Available-for-sale debt securities: |
||||||||||
| Reclassification adjustment for net gains reclassified into net income |
$ | Net gain on the sale of available-for-sale debt securities |
$ | ( |
) | Net gain on the sale of available-for-sale debt securities |
||||
| Taxes |
Income taxes |
Income taxes |
||||||||
| Net of tax amount |
$ | $ | ( |
) | ||||||
| For the Three Months Ended June 30, 2020 |
For the Six Months Ended June 30, 2020 |
|||||||||
| (in thousands) |
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Consolidated Statements of Income |
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Consolidated Statements of Income |
||||||
| Available-for-sale debt securities: |
||||||||||
| Reclassification adjustment for net gains reclassified into net income |
$ | ( |
) | Net gain on the sale of available-for-sale debt securities |
$ | ( |
) | Net gain on the sale of available-for-sale debt securities |
||
| Taxes |
Income taxes |
Income taxes |
||||||||
| Net of tax amount |
$ | ) | $ | ) | ||||||
The following table summarizes the changes in accumulated other comprehensive income, net of tax for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| (in thousands) |
2021 |
2020 |
2021 |
2020 |
||||||||||||
| Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss) before reclassifications |
( |
) | ||||||||||||||
| Amount reclassified from accumulated other comprehensive income |
( |
) | ( |
) | ( |
) | ||||||||||
| Net other comprehensive income (loss) during the period |
( |
) | ||||||||||||||
| Balance, end of period |
$ | $ | $ | $ | ||||||||||||
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in the Annual Report on Form 10-K for the year ended December 31, 2020 for FNCB Bancorp, Inc. In addition, please read this section in conjunction with the consolidated financial statements and notes to consolidated financial statements contained elsewhere herein.
FNCB Bancorp, Inc. and its subsidiaries ("FNCB") are in the business of providing customary retail and commercial banking services to individuals, businesses and local governments and municipalities through its wholly-owned subsidiary, FNCB Bank, at its 17 full-service branch offices within its primary market area, Northeastern Pennsylvania.
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
FNCB may from time to time make written or oral “forward-looking statements,” including statements contained in our filings with the Securities and Exchange Commission (“SEC”), in our reports to shareholders, and in our other communications, which are made in good faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to FNCB’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond our control). The words “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “future” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause FNCB’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the effect of the novel Coronavirus Disease 2019 ("COVID-19") pandemic on FNCB and its customers, the Commonwealth of Pennsylvania and the United States, related to the economy and overall financial stability; government and regulatory responses to the COVID-19 pandemic; government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including, but not limited to, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Tax Cuts and Jobs Act; political instability; the ability of FNCB to manage credit risk; weakness in the economic environment, in general, and within FNCB’s market area; the deterioration of one or a few of the commercial real estate loans with relatively large balances contained in FNCB’s loan portfolio; greater risk of loan defaults and losses from concentration of loans held by FNCB, including those to insiders and related parties; if FNCB’s portfolio of loans to small and mid-sized community-based businesses increases its credit risk; if FNCB’s ALLL is not sufficient to absorb actual losses or if increases to the allowance for loan and lease losses ("ALLL") were required; FNCB is subject to interest-rate risk and any changes in interest rates could negatively impact net interest income or the fair value of FNCB's financial assets; if management concludes that the decline in value of any of FNCB’s investment securities is other-than-temporary could result in FNCB recording an impairment loss; if FNCB’s risk management framework is ineffective in mitigating risks or losses to FNCB; if FNCB is unable to successfully compete with others for business; a loss of depositor confidence resulting from changes in either FNCB’s financial condition or in the general banking industry; if FNCB is unable to retain or grow its core deposit base; inability or insufficient dividends from its subsidiary, FNCB Bank; if FNCB loses access to wholesale funding sources; interruptions or security breaches of FNCB’s information systems; any systems failures or interruptions in information technology and telecommunications systems of third parties on which FNCB depends; security breaches; if FNCB’s information technology is unable to keep pace with growth or industry developments or if technological developments result in higher costs or less advantageous pricing; the loss of management and other key personnel; dependence on the use of data and modeling in both its management’s decision-making generally and in meeting regulatory expectations in particular; additional risk arising from new lines of business, products, product enhancements or services offered by FNCB; inaccuracy of appraisals and other valuation techniques FNCB uses in evaluating and monitoring loans secured by real property and other real estate owned; unsoundness of other financial institutions; damage to FNCB’s reputation; defending litigation and other actions; dependence on the accuracy and completeness of information about customers and counterparties; risks arising from future expansion or acquisition activity; environmental risks and associated costs on its foreclosed real estate assets; any remediation ordered, or adverse actions taken, by federal and state regulators, including requiring FNCB to act as a source of financial and managerial strength for the FNCB Bank in times of stress; costs arising from extensive government regulation, supervision and possible regulatory enforcement actions; new or changed legislation or regulation and regulatory initiatives; noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations; failure to comply with numerous "fair and responsible banking" laws; any violation of laws regarding privacy, information security and protection of personal information or another incident involving personal, confidential or proprietary information of individuals; any rulemaking changes implemented by the Consumer Financial Protection Bureau; non-compliance with the Paycheck Protection rules and regulations; inability to attract and retain its highest performing employees due to potential limitations on incentive compensation contained in proposed federal agency rulemaking; any future increases in FNCB Bank’s FDIC deposit insurance premiums and assessments; and the success of FNCB at managing the risks involved in the foregoing and other risks and uncertainties, including those detailed in FNCB’s filings with the SEC.
FNCB cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place undue reliance on any forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by FNCB on its website or otherwise. FNCB does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of FNCB to reflect events or circumstances occurring after the date of this report.
Readers should carefully review the risk factors described in the documents that FNCB periodically files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2020 and Quarterly Report on Form 10-Q for the period ended March 31, 2021.
Any references to FNCB's website, www.fncb.com or any variation thereof, shall not incorporate the contents of such website into this Report.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.
FNCB’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Management has identified the policies on the determination of the ALLL, the valuation of securities and evaluation of securities for impairment, the valuation of other real estate owned (“OREO”) and income taxes to be critical, as management is required to make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.
The judgments used by management in applying the critical accounting policies discussed below may be affected by changes and/or deterioration in the economic environment, which may impact future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the ALLL in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in FNCB’s investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to impairment losses.
Allowance for Loan and Lease Losses
Management evaluates the credit quality of FNCB’s loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ALLL on a quarterly basis. The ALLL is established through a provision for loan losses charged to earnings and is maintained at a level management considers adequate to absorb estimated probable losses inherent in the loan portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ALLL, while recoveries of amounts previously charged off are credited to the ALLL.
Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, qualitative factors, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL. Additionally, the ALLL is determined, in part, by the composition and size of the loan portfolio.
The ALLL consists of two components, a specific component and a general component. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted by qualitative factors. The general reserve component of the ALLL is based on pools of unimpaired loans segregated by loan segment and risk rating categories of “Pass,” “Special Mention” or “Substandard and Accruing.” Historical loss factors and various qualitative factors are applied based on the risk profile in each risk rating category to determine the appropriate reserve related to those loans. Substandard loans on non-accrual status above the $100 thousand loan relationship threshold and all loans considered troubled debt restructurings (“TDRs”) are classified as impaired.
See Note 4, “Loans” of the notes to consolidated financial statements included in Item 1 hereof for additional information about the ALLL.
Securities Valuation and Evaluation for Impairment
Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (Level 1) or quoted prices for similar assets or models using inputs that are observable, either directly or indirectly (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of observable inputs or if markets are illiquid, valuation techniques are used to determine fair value of any investments that require inputs that are both unobservable and significant to the fair value measurement (Level 3). For Level 3 inputs, valuation techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on FNCB’s financial condition or results of operations. See Note 3, “Securities” and Note 10, “Fair Value Measurements” of the notes to consolidated financial statements included in Item 1 hereof for additional information about FNCB’s securities valuation techniques.
On a quarterly basis, management evaluates individual investment securities in an unrealized loss position for other than temporary impairment (“OTTI”). The evaluation for OTTI requires the use of various assumptions, including but not limited to, the length of time an investment’s fair value is less than book value, the severity of the investment’s decline, any credit deterioration of the issuer, whether management intends to sell the security, and whether it is more-likely-than-not that FNCB will be required to sell the security prior to recovery of its amortized cost basis. Debt investment securities deemed to have OTTI are written down by the impairment related to the estimated credit loss, and the non-credit related impairment loss is recognized in other comprehensive income. FNCB did not recognize any OTTI charges on investment securities for the three and six months ended June 30, 2021 and 2020 within the consolidated statements of income.
Refer to Note 3, “Securities,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about valuation of securities.
Other Real Estate Owned
OREO consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a loan, and bank premises that are no longer used for operation or for future expansion. OREO is held for sale and is initially recorded at fair value less estimated costs to sell at the date of acquisition or transfer, which establishes a new cost basis. Upon acquisition of the property through foreclosure or deed-in-lieu of foreclosure, any adjustment to fair value less estimated selling costs is recorded to the ALLL. The determination is made on an individual asset basis. Bank premises no longer used for operations or future expansion are transferred to OREO at fair value less estimated selling costs with any related write-down included in non-interest expense. Subsequent to acquisition, valuations are periodically performed and the assets are carried at the lower of cost or fair value less estimated cost to sell. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed agreements of sale, unless management determines that conditions exist that warrant an adjustment to the value. Costs relating to the development and improvement of the OREO properties may be capitalized; holding period costs and any subsequent changes to the valuation allowance are charged to expense as incurred.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in FNCB’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our consolidated financial condition or results of operations.
FNCB records an income tax provision or benefit based on the amount of tax currently payable or receivable and the change in deferred tax assets and liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Management conducts quarterly assessments of all available positive and negative evidence to determine the amount of deferred tax assets that will more likely than not be realized. FNCB establishes a valuation allowance for deferred tax assets and records a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, management considers past operating results, estimates of future taxable income based on approved business plans, future capital requirements and ongoing tax planning strategies. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period depending on the related circumstances. The recognition of deferred tax assets requires management to make significant assumptions and judgments about future earnings, the periods in which items will impact taxable income, future corporate tax rates, and the application of inherently complex tax laws. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which may result in equity and earnings volatility because such changes are reported in current period earnings.
In connection with determining the income tax provision or benefit, management considers maintaining liabilities for uncertain tax positions and tax strategies that it believes contain an element of uncertainty. Periodically, management evaluates each of FNCB’s tax positions and strategies to determine whether a liability for uncertain tax benefits is required. As of June 30, 2021 and December 31, 2020, management determined that FNCB did not have any uncertain tax positions or tax strategies and that no liability was required to be recorded.
Refer to Note 5, “Income Taxes,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about income taxes.
New Authoritative Accounting Guidance and Accounting Guidance to be Adopted in Future Periods
Refer to Note 2, “New Authoritative Accounting Guidance,” of the notes to consolidated financial statements included in Item 1 hereof for information about new authoritative accounting guidance adopted by FNCB as of June 30, 2021, as well as new accounting guidance issued, but not previously reported, that will be adopted by FNCB in future periods.
Impact of the COVID-19 pandemic
On December 27, 2020, another COVID-19 relief bill was signed into law that extended and modified several provisions of the PPP to include an additional allocation of $284 billion in funding. On January 19, 2021, FNCB began originating additional PPP under this round of funding. The SBA continued to accept new applications through May 31, 2021. During the six months ended June 30, 2021, FNCB had generated and received SBA approval and funding for 679 PPP loans totaling $76.3 million and received $3.6 million in related loan origination fees associated with this funding, which has been deferred and will be recognized upon forgiveness or repayment. During the six months ended June 30, 2021, FNCB received forgiveness for PPP loans totaling $69.1 million, with $2.3 million in PPP loan origination fees, net of loan origination costs, recognized into interest income upon forgiveness. PPP loans outstanding at June 30, 2021 were $85.8 million. FNCB expects to apply and receive forgiveness for the majority of these loans by the end of 2021.
During the first half of 2021, widespread availability and distribution of vaccines has led to lifting of restrictions, reopening of the economy and improving economic growth across the United States and more specifically within our market area. In early April 2021, the Governor of Pennsylvania reduced some of the restrictions on certain businesses, primarily restaurants and hospitality-related businesses. However, lingering effects from the COVID-19 pandemic, including the effects of variants, such as the Delta variant, continue to impact employment and supply-chains affecting national, regional and local economies. FNCB branches are open, and while fully operational, FNCB continues to follow CDC and Commonwealth guidance and take additional precautions to ensure the safety of its customers and its employees. Specifically, plexiglass shields are utilized in teller and personal banker areas and 6 feet social distancing signage remains in place. Fully-vaccinated customers and employees, as of the date of this Report, are allowed to enter bank premises without face masks. FNCB requires employees who are not fully-vaccinated to wear masks at all times while on bank premises.
Regarding our banking operations, commercial activity within our market area, while improving, remains volatile and has not returned pre-pandemic levels. Economic restrictions adopted in 2020 caused many borrowers to request payment deferrals and other payment accomodations. As of the end of the second quarter of 2021, nearly all have resumed making contractual principal and interest payments. While positive developments have occurred, management is keenly aware that uncertainty regarding the pandemic still exists. The number of positive cases has risen in recent weeks, as the Delta variant of the virus has begun rapidly spreading, specifically in areas with low vaccination rates. The reinstitution of restrictions by federal, state and local governmentsm, if adopted, could negatively impact economic recovery, and result in financial distress for FNCB’s business and consumer customers, which could impede loan growth and result in asset quality deterioration. Additionally, FNCB's commercial customer base includes businesses in industries such as hotel/lodging, restaurants, hospitality, and retail and commercial real estate, all of which had been significantly and adversely impacted in 2020 by economic restriction related to the COVID-19 pandemic. Management continues to closely monitor customers within these industries as the economic recovery unfolds.
Management expects the COVID-19 pandemic, as well as certain provisions of legislative and regulatory relief efforts, to continue to impact FNCB's operations. The full impact is still unknown, continues to evolve and will be contingent upon the spread of variant strains, vaccination rates and continued economic recovery. At this time, management cannot determine or estimate the full magnitude of the impact and cannot provide any assurances as to the effect on FNCB's results of operations or financial position. The FNCB team will continue to work diligently to address any issues related to the COVID-19 pandemic in a safe and sound manner as they arise. Management believes that FNCB's balance sheet and capital position are strong and will allow FNCB to withstand any further challenges that may be presented.
Executive Summary
The following overview should be read in conjunction with this MD&A in its entirety.
FNCB recorded consolidated net income of $5.2 million, or $0.26 per basic and diluted common share, for the three months ended June 30, 2021, an increase of $1.2 million, or 30.0%, compared to $4.0 million, or $0.20 per basic and diluted common share, for the three months ended June 30, 2020. The increase in second quarter earnings was primarily due to a $2.4 million, or 25.6%, increase in net interest income, coupled with a $0.7 million, or 81.3%, reduction in the provision for loan and lease losses. Partially offsetting these favorable variances comparing the three months ended June 30, 2021 and 2020 was a $0.8 million, or 31.7%, reduction in non-interest income and a $0.8 million, or 12.5%, increase in non-interest expense. Net income for the six months ended June 30, 2021 totaled $11.1 million, or $0.55 per basic and diluted share, an increase of $5.0 million, or 81.8%, compared to $6.1 million, or $0.30 per basic and diluted shares, for the same six months of 2020. Similar to the quarterly period, the increase in year-to-date net income was caused primarily by a $4.7 million, or 24.9%, increase in net interest income and a $1.6 million, or 82.8%, reduction in the provision for loan and lease losses, partially offset by an $0.8 million, or 5.6%, increase in non-interest expense. However, comparing the six months ended June 30, 2021 and 2020, non-interest income increased $0.3 million, or 6.9%.
For the three and six months ended June 30, 2021, the annualized return on average assets was 1.38% and 1.49%, respectively, and 1.21% and 0.96%, respectively, for the same period of 2020. The annualized return on average equity was 13.37% and 14.31%, respectively for the three and six months ended June 30, 2021, compared to 11.62% and 8.87%, for the comparable periods of 2020. FNCB declared and paid dividends to holders of common stock of $0.060 per share for the second quarter of 2021 and $0.120 per share for the six months ended June 30, 2021, a 9.1% increase compared to $0.055 and $0.110 per share for the same periods of 2020.
Total assets increased $59.1 million, or 4.0%, to $1.525 billion at June 30, 2021 from $1.466 billion at December 31, 2020. The change in total assets primarily reflected increases in net loans and available-for-sale debt securities, which were partially offset by a decrease in cash and cash equivalents. Net loans increased $75.1 million, or 8.4%, to $964.3 million at June 30, 2021 from $889.2 million at December 31, 2020. Also contributing to the balance sheet expansion was a $82.8 million, or 23.6%, increase in available-for-sale debt securities to $432.8 million at June 30, 2021 from $350.0 million at December 31, 2020. Cash and cash equivalents decreased $99.9 million, or 64.1%, to $55.9 million at June 30, 2021 from $155.8 million at December 31, 2020. Total deposits increased $50.7 million, or 3.9%, to $1.338 billion at June 30, 2021 from $1.287 billion at December 31, 2020. Total borrowed funds, comprised entirely of FNCB's junior subordinated debentures, remained constant at $10.3 million at June 30, 2021 and December 31, 2020.
On January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program under which up to 975,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier than February 3, 2021 and expiring December 31, 2021, pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Under the program, shares are purchased from time to time at prevailing market prices, through open market transactions depending upon market conditions and administered through an independent broker. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan. Under the program, the purchases will be funded from available working capital presently available to FNCB, and the repurchased shares will be returned to the status of authorized but unissued shares of Common Stock. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue at any time that management determines additional repurchases are no longer warranted. As of June 30, 2021, FNCB repurchased 193,530 shares for an approximate aggregate cost of $1.4 million.
Total shareholders’ equity increased $4.7 million, or 3.1%, to $160.6 million at June 30, 2021 from $155.9 million at December 31, 2020. The increase in capital was primarily due to net income for the six months ended June 30, 2021 of $11.1 million, partially offset by $2.4 million in dividends declared and paid for the six months ended June 30, 2021, a $2.7 million decrease in accumulated other comprehensive income related primarily to the depreciation in the fair value of FNCB's available-for-sale debt securities, net of deferred taxes, and $1.4 million for the repurchase of common shares. FNCB Bank's total risk-based capital and Tier 1 leverage ratios were 15.79% and 9.90% at June 30, 2021, respectively, compared to 15.79% and 9.57% at December 31, 2020, respectively.
For the remainder of 2021, management is focused on assisting customers with PPP loans through the forgiveness process, enhancing FNCB’s digital banking platform and evaluating opportunities to leverage capital to improve FNCB’s future profitability.
Summary of Performance
Net Interest Income
Net interest income, defined as the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits and borrowed funds, is the primary source of earnings for commercial banks. As such, it is the primary determinant of profitability for FNCB. Net interest income is impacted by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market rates and the level of non-performing assets. Interest income is presented on a fully tax-equivalent basis using the corporate statutory tax rate of 21.0% in 2021 and 2020.
In response to the significant disruption and uncertainty in the economic environment brought on by COVID-19, the Federal Open Market Committee ("FOMC") lowered the federal funds target rate 150 basis points in two emergency actions in March 2020. As a result, the target range for federal funds fell from 1.50%-1.75% at December 31, 2020 to 0.00%-0.25% at March 31, 2020 and has remained at that level through June 30, 2021. The FOMC actions, along with decreases in general market interest rates, have resulted in decreases in yields earned on earning-assets, as well as the rates paid on interest-bearing liabilities comparing the three and six months ended June 30, 2021 and 2020. Additionally, net interest income, earning-asset yields and the net interest margin were impacted by the origination, funding and forgiveness of PPP loans.
Net interest income on a tax-equivalent basis increased $2.5 million, or 25.3%, to $12.3 million for the three months ended June 30, 2021 from $9.8 million for the comparable period of 2020. The improvement in tax-equivalent net interest income primarily reflected an increase in tax-equivalent interest income of $1.6 million or 14.3%, to $13.0 million for the second quarter of 2021 from $11.4 million for the same quarter of 2020, coupled with a decrease in interest expense of $0.8 million, or 52.4%, to $0.8 million from $1.6 million comparing the second quarters of 2021 and 2020. The tax-equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-earning assets. FNCB’s tax-equivalent net interest margin improved 40 basis points to 3.58% for the second quarter of 2021 from 3.18% for the same quarter of 2020, and 30 basis points to 3.53% for the six months ended June 30, 2021, from 3.23% for the same six-month period of 2020. The margin improvement was primarily impacted by activity related to PPP loans, coupled with decreases in funding costs. Additionally, rate spread, the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities shown on a fully tax-equivalent basis, improved 49 basis points to 3.50% for the three months ended June 30, 2021 from 3.01% for the same three months of 2020 . For the year-to-date period ended June 30, 2021, the rate spread improved 41 basis points to 3.45% from 3.04% for the same period of 2020.
The $1.6 million, or 14.3%, increase in tax-equivalent interest income comparing the second quarters of 2021 and 2020 largely reflected higher volumes of earning assets, coupled with a net increase in the tax-equivalent yield on earning assets. Total average earning assets increased $138.1 million, or 11.2%, to $1.371 billion for the three months ended June 30, 2021 from $1.233 billion for the same three months of 2020, which resulted in a corresponding increase in tax-equivalent interest income of $1.0 million. Specifically, total securities averaged $409.2 million for the second quarter of 2021, an increase of $105.0 million, or 34.5%, from $304.2 million for the second quarter of 2020, which was largely due to the redeployment of excess cash into the investment portfolio. Additionally, average total loans increased $32.4 million, or 3.5%, to $954.4 million for the second quarter of 2021 from $922.0 million for the same quarter of 2020, which largely reflected PPP loans originated under the second round of funding for this program. The average balance of PPP loans increased $15.9 million, or 17.7%, to $105.7 million for the second quarter of 2021 from $89.8 million for the second quarter of 2020. Increases in the average balances of securities and loans resulted in corresponding increases to tax-equivalent interest income of $0.7 million and $0.3 million, respectively, comparing the three months ended June 30, 2021 and 2020. In addition to the volume increase there was a 10-basis point increase in the tax-equivalent yield on earning assets, which resulted in a corresponding increase in tax-equivalent interest income of $0.6 million. The tax-equivalent yield on the loan portfolio increased 35 basis points to 4.33% for the three months ended June 30, 2021 compared to 3.98% for the same three months of 2020. Loan yields were favorably impacted by the recognition of $1.1 million in net deferred loan origination fees on forgiven PPP loans. Partially offsetting the positive impact due to the increase in loan yields, was a 30-basis point reduction in the tax-equivalent yield on the securities portfolio to 2.63% for the second quarter of 2021 from 2.93% for the same quarter of 2020, which resulted in a corresponding decrease to tax-equivalent interest income of $0.3 million.
The $0.8 millon, or 52.4%, decrease in interest expense was primarily due to a 39-basis point reduction in the cost of funds to 0.30% for the three months ended June 30, 2021 from 0.69% for the same three months of 2020. Specifically, the average rate paid for interest-bearing deposits decreased 37 basis points to 0.28% for the second quarter of 2021 from 0.65% for the same period of 2020, resulting in a corresponding decrease to interest expense of $0.8 million. The average rates paid for interest-bearing demand and time deposits, which reflected the reduction in market interest rates and repricing of higher-costing time deposit upon maturity, decreased 34 basis points and 53 basis points, respectively, comparing the three months ended June 30, 2021 and 2020. The decrease in interest expense due to changes in deposit rates was coupled with a $71.5 million, or 87.4% decrease in average borrowed funds comparing the three months ended June 30, 2021 to the same period of 2020, which resulted in a corresponding decrease in interest expense $0.3 million. FNCB experienced strong deposit growth due to additional fiscal stimulus passed in the first quarter of 2021. Changing customer deposit preferences due to the reduction in economic activity and uncertainty related to the COVID-19 pandemic also contributed to the deposit growth, as well as factoring into deposit migration from time deposits into non-maturity deposits. Specifically, average interest-bearing deposits increased $169.1 million, or 19.9%, to $1.020 billion from $850.5 million comparing the second quarters of 2021 and 2020, respectively. Average interest-bearing demand deposits increased $149.3 million, or 26.5%, to $712.8 million for the second quarter of 2021 compared to $563.5 million for the same quarter of 2020, while average savings deposits increased $23.8 million, or 24.0%, to $123.3 million from $99.4 million comparing the second quarters of 2021 and 2020, respectively. Conversely, average time deposits decreased $4.0 million to $183.6 million for the three months ended June 30, 2021 from $187.6 million for the same three months of 2020. The strong growth in deposit volumes resulted in a combined net increase to interest expense of $0.1 million. Average borrowed funds decreased $71.5 million, or 87.4%, to $10.3 million from $81.8 million comparing the second quarters of 2021 and 2020, which resulted in a decrease to interest expense of $0.3 million, as previously mentioned.
On a year-to-date basis, tax-equivalent net interest income increased $4.8 million, or 25.1%, to $23.9 million for the six months ended June 30, 2021 from $19.1 million for the comparable period of 2020. The improvement in tax-equivalent net interest income was due to a $2.8 million, or 12.5%, increase in tax-equivalent interest income, coupled with a $2.0 million, or 54.9%, decrease in interest expense. The increase in tax-equivalent interest income for the year-to-date period resulted primarily from the $179.8 million, or 15.3%, increase in average earning asset balances. Average total security balances increased $97.9 million, or 34.0%, to $385.7 million for the six months ended June 30, 2021 from $287.8 million for the same period of 2020, resulting in an increase of $1.4 million in interest income. In addition, average loan balances increased $59.8 million, or 6.8%, to $937.5 million for the six months ended June 30, 2021, compared to $877.7 million for the same six months of 2020, resulting in an increase of $1.3 million in interest income. Changes in the tax-equivalent yields on earnings assets had only a modest impact on year-to-date tax-equivalent interest income, as an 11-basis point increase in the tax-equivalent yield on the loan portfolio was almost entirely offset by a 20-basis point reduction in the tax-equivalent yield on the securities portfolio.
The $2.0 million, or 54.9%, decrease in interest expense resulted primarily from a decrease in funding costs, and a reduction in average borrowed funds, partially offset by an increase in average interest-bearing deposits. FNCB's total cost of funds decreased 47 basis points to 0.32% for the six months ended June 30, 2021 from 0.79% for the same six months of 2020, resulting in a corresponding decrease to interest expense of $1.8 million. The cost of interest-bearing deposits decreased 43 basis points to 0.30% from 0.73%, respectively, comparing the six months ended June 30, 2021 and 2020. Specifically, comparing the year-to-date periods of 2021 and 2020, the rates paid on time deposits, interest-bearing demand deposits and savings deposits decreased 56 basis points, 41 basis points and 4 basis points, respectively. Regarding volumes of interest-bearing liabilities, borrowed funds averaged $10.3 million for the six months ended June 30, 2021, a decrease of $61.5 million, or 85.7%, from $71.8 million for the same period of 2020, which resulted in a corresponding decrease to interest expense of $0.5 million. Partially offsetting this decrease was a $173.5 million, or 20.8%, increase in average interest-bearing deposits to $1.009 billion for the first half of 2021 compared to $835.9 million for the same period of 2021, which resulted in additional interest expense of $0.3 million.
Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following tables present certain information about FNCB’s consolidated statements of financial condition and consolidated statements of income for the three and six-month periods ended June 30, 2021 and 2020 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.
| Three Months Ended |
||||||||||||||||||||||||
| June 30, 2021 |
June 30, 2020 |
|||||||||||||||||||||||
| Average |
Yield/ |
Average |
Yield/ |
|||||||||||||||||||||
| (dollars in thousands) |
Balance |
Interest |
Cost |
Balance |
Interest |
Cost |
||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Earning assets (2)(3) |
||||||||||||||||||||||||
| Loans-taxable (4) |
$ | 909,833 | $ | 9,897 | 4.35 | % | $ | 875,119 | $ | 8,661 | 3.96 | % | ||||||||||||
| Loans-tax free (4) |
44,583 | 437 | 3.92 | % | 46,836 | 505 | 4.31 | % | ||||||||||||||||
| Total loans (1)(2) |
954,416 | 10,334 | 4.33 | % | 921,955 | 9,166 | 3.98 | % | ||||||||||||||||
| Securities-taxable |
326,848 | 2,039 | 2.50 | % | 247,939 | 1,739 | 2.81 | % | ||||||||||||||||
| Securities-tax free |
82,304 | 653 | 3.17 | % | 56,220 | 491 | 3.49 | % | ||||||||||||||||
| Total securities (1)(5) |
409,152 | 2,692 | 2.63 | % | 304,159 | 2,230 | 2.93 | % | ||||||||||||||||
| Interest-bearing deposits in other banks and federal funds sold (8) |
7,042 | 1 | 0.06 | % | 6,439 | 3 | 0.19 | % | ||||||||||||||||
| Total earning assets (8) |
1,370,610 | 13,027 | 3.80 | % | 1,232,553 | 11,399 | 3.70 | % | ||||||||||||||||
| Non-earning assets (8) |
158,239 | 118,722 | ||||||||||||||||||||||
| Allowance for loan and lease losses |
(12,378 | ) | (10,114 | ) | ||||||||||||||||||||
| Total assets |
$ | 1,516,471 | $ | 1,341,161 | ||||||||||||||||||||
| Liabilities and Shareholders' Equity |
||||||||||||||||||||||||
| Interest-bearing liabilities |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 712,760 | 327 | 0.18 | % | $ | 563,491 | 728 | 0.52 | % | ||||||||||||||
| Savings deposits |
123,261 | 22 | 0.07 | % | 99,434 | 23 | 0.09 | % | ||||||||||||||||
| Time deposits |
183,591 | 369 | 0.80 | % | 187,600 | 625 | 1.33 | % | ||||||||||||||||
| Total interest-bearing deposits |
1,019,612 | 718 | 0.28 | % | 850,525 | 1,376 | 0.65 | % | ||||||||||||||||
| Borrowed funds and other interest-bearing liabilities |
10,310 | 48 | 1.86 | % | 81,813 | 234 | 1.14 | % | ||||||||||||||||
| Total interest-bearing liabilities |
1,029,922 | 766 | 0.30 | % | 932,338 | 1,610 | 0.69 | % | ||||||||||||||||
| Demand deposits |
317,670 | 258,609 | ||||||||||||||||||||||
| Other liabilities |
11,998 | 11,065 | ||||||||||||||||||||||
| Shareholders' equity |
156,881 | 139,149 | ||||||||||||||||||||||
| Total liabilities and shareholder's equity |
$ | 1,516,471 | $ | 1,341,161 | ||||||||||||||||||||
| Net interest income/interest rate spread (6) (8) |
12,261 | 3.50 | % | 9,789 | 3.01 | % | ||||||||||||||||||
| Tax equivalent adjustment |
(229 | ) | (209 | ) | ||||||||||||||||||||
| Net interest income as reported |
$ | 12,032 | $ | 9,580 | ||||||||||||||||||||
| Net interest margin (7) (8) |
3.58 | % | 3.18 | % | ||||||||||||||||||||
| (1) |
Interest income is presented on a tax equivalent basis using a 21% rate. |
|
| (2) |
Loans are stated net of unearned income. |
|
| (3) |
Non-accrual loans are included in loans within earning assets. |
|
| (4) |
Loan fees included in interest income are not significant. |
|
| (5) |
The yields for securities that are classified as available for sale is based on the average historical amortized cost. |
|
| (6) |
Interest rate spread represents the difference between the average yield on interest earning assets and the cost of interest-bearing liabilities and is presented on a tax equivalent basis. |
|
| (7) |
Net interest income as a percentage of total average interest earning assets. |
|
| (8) | Reflects revisions to average balances for the three months ended June 30, 2020 to reclassify certain average deposits in other banks from non-interest deposits in other banks to non-earning assets in the amount of $21,419. |
| Six Months Ended |
||||||||||||||||||||||||
| June 30, 2021 |
June 30, 2020 |
|||||||||||||||||||||||
| Average |
Yield/ |
Average |
Yield/ |
|||||||||||||||||||||
| (dollars in thousands) |
Balance |
Interest |
Cost |
Balance |
Interest |
Cost |
||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Earning assets (2)(3) |
||||||||||||||||||||||||
| Loans-taxable (4) |
$ | 891,789 | $ | 19,298 | 4.33 | % | $ | 827,987 | $ | 17,354 | 4.19 | % | ||||||||||||
| Loans-tax free (4) |
45,733 | 924 | 4.04 | % | 49,726 | 1,070 | 4.30 | % | ||||||||||||||||
| Total loans (1)(2) |
937,522 | 20,222 | 4.31 | % | 877,713 | 18,424 | 4.20 | % | ||||||||||||||||
| Securities-taxable |
306,601 | 4,007 | 2.61 | % | 255,817 | 3,666 | 2.87 | % | ||||||||||||||||
| Securities-tax free |
79,108 | 1,268 | 3.21 | % | 31,959 | 563 | 3.52 | % | ||||||||||||||||
| Total securities (1)(5) |
385,709 | 5,275 | 2.74 | % | 287,776 | 4,229 | 2.94 | % | ||||||||||||||||
| Interest-bearing deposits in other banks and federal funds sold (8) |
28,904 | 4 | 0.03 | % | 6,835 | 24 | 0.70 | % | ||||||||||||||||
| Total earning assets (8) |
1,352,135 | 25,501 | 3.77 | % | 1,172,324 | 22,677 | 3.83 | % | ||||||||||||||||
| Non-earning assets (8) |
154,128 | 109,620 | ||||||||||||||||||||||
| Allowance for loan and lease losses |
(12,284 | ) | (9,540 | ) | ||||||||||||||||||||
| Total assets |
$ | 1,493,979 | $ | 1,272,404 | ||||||||||||||||||||
| Liabilities and Shareholders' Equity |
||||||||||||||||||||||||
| Interest-bearing liabilities |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 704,324 | 707 | 0.20 | % | $ | 546,146 | 1,658 | 0.61 | % | ||||||||||||||
| Savings deposits |
118,830 | 42 | 0.07 | % | 96,712 | 51 | 0.11 | % | ||||||||||||||||
| Time deposits |
186,252 | 767 | 0.82 | % | 193,013 | 1,327 | 1.38 | % | ||||||||||||||||
| Total interest-bearing deposits |
1,009,406 | 1,516 | 0.30 | % | 835,871 | 3,036 | 0.73 | % | ||||||||||||||||
| Borrowed funds and other interest-bearing liabilities |
10,310 | 96 | 1.86 | % | 71,828 | 541 | 1.51 | % | ||||||||||||||||
| Total interest-bearing liabilities |
1,019,716 | 1,612 | 0.32 | % | 907,699 | 3,577 | 0.79 | % | ||||||||||||||||
| Demand deposits |
306,161 | 215,371 | ||||||||||||||||||||||
| Other liabilities |
12,205 | 11,350 | ||||||||||||||||||||||
| Shareholders' equity |
155,897 | 137,984 | ||||||||||||||||||||||
| Total liabilities and shareholder's equity |
$ | 1,493,979 | $ | 1,272,404 | ||||||||||||||||||||
| Net interest income/interest rate spread (6) (8) |
23,889 | 3.45 | % | 19,100 | 3.04 | % | ||||||||||||||||||
| Tax equivalent adjustment |
(460 | ) | (343 | ) | ||||||||||||||||||||
| Net interest income as reported |
$ | 23,429 | $ | 18,757 | ||||||||||||||||||||
| Net interest margin (7) (8) |
3.53 | % | 3.23 | % | ||||||||||||||||||||
| (1) |
Interest income is presented on a tax equivalent basis using a 21% rate. |
|
| (2) |
Loans are stated net of unearned income. |
|
| (3) |
Non-accrual loans are included in loans within earning assets. |
|
| (4) |
Loan fees included in interest income are not significant. |
|
| (5) |
The yields for securities that are classified as available for sale is based on the average historical amortized cost. |
|
| (6) |
Interest rate spread represents the difference between the average yield on interest earning assets and the cost of interest-bearing liabilities and is presented on a tax equivalent basis. |
|
| (7) |
Net interest income as a percentage of total average interest earning assets. |
|
| (8) | Reflects revisions to average balances for the three months ended June 30, 2020 to reclassify certain average deposits in other banks from non-interest deposits in other banks to non-earning assets in the amount of $11,292. |
Rate Volume Analysis
The most significant impact on net income between periods is derived from the interaction of changes in the volume and rates earned or paid on interest-earning assets and interest-bearing liabilities. The volume of earning assets, specifically loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in net interest income between periods. Components of interest income and interest expense are presented on a tax-equivalent basis using the corporate federal income tax rate of 21%.
The following table summarizes the effect that changes in volumes of earning assets and interest-bearing liabilities and the interest rates earned and paid on these assets and liabilities have on net interest income. The net change or mix component attributable to the combined impact of rate and volume changes has been allocated proportionately to the change due to volume and the change due to rate.
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||||
| 2021 vs. 2020 |
2021 vs. 2020 |
|||||||||||||||||||||||
| Increase (Decrease) |
Increase (Decrease) |
|||||||||||||||||||||||
| Due to |
Due to |
Total |
Due to |
Due to |
Total |
|||||||||||||||||||
| (in thousands) |
Volume |
Rate |
Change |
Volume |
Rate |
Change |
||||||||||||||||||
| Interest income: |
||||||||||||||||||||||||
| Loans - taxable |
$ | 353 | $ | 883 | $ | 1,236 | $ | 1,368 | $ | 576 | $ | 1,944 | ||||||||||||
| Loans - tax free |
(24 | ) | (45 | ) | (69 | ) | (83 | ) | (63 | ) | (146 | ) | ||||||||||||
| Total loans |
329 | 838 | 1,167 | 1,285 | 513 | 1,798 | ||||||||||||||||||
| Securities - taxable |
508 | (208 | ) | 300 | 683 | (342 | ) | 341 | ||||||||||||||||
| Securities - tax free |
210 | (48 | ) | 162 | 760 | (55 | ) | 705 | ||||||||||||||||
| Total securities |
718 | (256 | ) | 462 | 1,443 | (397 | ) | 1,046 | ||||||||||||||||
| Interest-bearing deposits in other banks and federal funds sold |
- | (2 | ) | (2 | ) | 20 | (40 | ) | (20 | ) | ||||||||||||||
| Total interest income |
1,047 | 580 | 1,627 | 2,748 | 76 | 2,824 | ||||||||||||||||||
| Interest expense: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
157 | (558 | ) | (401 | ) | 383 | (1,334 | ) | (951 | ) | ||||||||||||||
| Savings deposits |
5 | (6 | ) | (1 | ) | 10 | (19 | ) | (9 | ) | ||||||||||||||
| Time deposits |
(13 | ) | (243 | ) | (256 | ) | (45 | ) | (515 | ) | (560 | ) | ||||||||||||
| Total interest-bearing deposits |
149 | (807 | ) | (658 | ) | 348 | (1,868 | ) | (1,520 | ) | ||||||||||||||
| Borrowed funds and other interest-bearing liabilities |
(279 | ) | 93 | (186 | ) | (549 | ) | 104 | (445 | ) | ||||||||||||||
| Total interest expense |
(130 | ) | (714 | ) | (844 | ) | (201 | ) | (1,764 | ) | (1,965 | ) | ||||||||||||
| Net interest income |
$ | 1,177 | $ | 1,294 | $ | 2,471 | $ | 2,949 | $ | 1,840 | $ | 4,789 | ||||||||||||
Provision for Loan and Lease Losses
The provision for loan and lease losses is an expense charged against net interest income to provide for probable losses attributable to uncollectible loans and is based on management’s analysis of the adequacy of the ALLL. A release of reserves, resulting in a credit for loan and lease losses, reflects the reversal of amounts previously charged to the ALLL. Management closely monitors the loan portfolio and the adequacy of the ALLL by considering the underlying financial performance of the borrower, collateral values and associated credit risks. Future material adjustments may be necessary to the provision for loan and lease losses and the ALLL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ALLL. In 2020, management tried to address any potential adverse impact the COVID-19 pandemic had on economic conditions in its application of FNCB's methodology on the ALLL by adjusting the qualitative factor associated with changes in national, local and business economic conditions and developments and increasing the unallocated portion of the ALLL to a maximum of 10.0% of the total allowance. Both actions resulted in higher credit provisioning in 2020. During the first half of 2021, FNCB's asset quality metrics have remained favorable and FNCB is not aware of any losses related to COVID-19 as of the date of this Report. While the economy has begun to recover, COVID-19 continues to be an issue as the number of new cases related to the Delta variant have started to increase. Due to the continued uncertainty surrounding the virus, management has maintained the qualitative factor associated with changes in national, local and business economic conditions and development at the heightened level established in 2020.
FNCB recorded a provision for loan and lease losses of $155 thousand for the three-month period ended June 30, 2021 compared to $831 thousand for the three months ended June 30, 2020. The provision for loan and lease losses totaled $341 thousand for the six months ended June 30, 2021, a decrease of $1.6 million, from $2.0 million for the same six months of 2020, reflecting the higher credit provisioning during 2020.
Non-interest Income
For the three months ended June 30, 2021, non-interest income decreased $0.8 million, or 31.7%, to $1.7 million from $2.5 million for the three months ended June 30, 2020. The decrease was largely due to reductions in net gains on the sale of available-for-sale debt securities of $922 thousand and loan referral fees of $198 thousand, partially offset by an increase in deposit service charges of $248 thousand. There were no net gains realized on the sale of available-for-sale debt securities during the three months ended June 30, 2021. Comparatively, net gains realized on the sale of available-for-sale debt securities were $922 thousand for the same three-month period of 2020. Loan referral fees include fees received from counterparties related to various commercial loan interest rate swap transactions and fees received for the referral of FHA residential mortgage loans to a third-party broker. The reduction in loan referral fees reflected a decrease in the number and volume of such transactions in 2021 as compared to 2020. These reductions were partially offset by a $248 thousand, or 35.0%, increase in deposit service charges to $956 thousand for the three months ended June 30, 2021 compared to $708 thousand for the three months ended June 30, 2020.
For the six months ended June 30, 2021, non-interest income increased $288 thousand, or 6.8%, to $4.5 million from $4.2 million for the same period of 2020. The increase resulted primarily from a settlement in the amount of $426 thousand from bank-owned life insurance death benefit claim that was recognized in 2021, coupled with increases in net gains on equity securities, deposit service charges and loan-related fees. Net gains on equity securities were $400 thousand for the six months ended June 30, 2021, compared to $18 thousand for the same period of 2020, an increase of $382 thousand. Deposit service charges increased $297 thousand, or 19.4%, to $1.8 million from $1.5 million for the same six-month period of 2020, resulting from an increase in debit card usage. Additionally, loan-related fees increased $156 thousand, or 192.6%, to $237 thousand for the six months ended June 30, 2021, compared to $81 thousand for the six months ended June 30, 2020. The increase in loan related fees was due primarily to the recognition of servicing fees on loans originated under the Main Street Lending Program. These increases were slightly offset by a $858 thousand, or 80.1%, decrease in net gains on available-for-sale debt securities to $213 thousand for the six months ended June 30, 2021 from $1.1 million for the same period of 2020.
Non-interest Expense
Non-interest expense increased $802 thousand, or 12.5% to $7.2 million for the three months ended June 30, 2021 from $6.4 million for the three months ended June 30, 2020. The increase primarily reflected increases in salaries and benefits, data processing, and advertising expenses. Salaries and benefits increased $540 thousand, or 15.4%, to $4.0 million for the three months ended June 30, 2021, from $3.5 million for the same period in 2020. Data processing and advertising expenses increased $176 thousand and $101 thousand, respectively, to $885 thousand and $214 thousand, respectively, for the second quarter of 2021 when compared to the same quarter of 2020.
For the six months ended June 30, 2021, non-interest expense increased $768 thousand, or 5.6%, to $14.4 million compared to $13.6 million for the same six month period of 2020, primarily due to the increase salaries and employee benefits, data processing expenses and regulatory assessments. Salaries and employee benefits increased $347 thousand, or 4.7%, to $7.8 million at June 30, 2021, compared to $7.4 million for the six months ended June 30, 2020. Data processing expenses increased $270 thousand, or 18.8%, to $1.7 million for the first half of 2021, compared to $1.4 million for the same period of 2020. Regulatory assessments increased $167 thousand, or 125.6%, to $300 thousand at June 30, 2021, from $133 thousand for the six months ended June 30, 2020.
Marketing initiatives were very limited during the second quarter of 2020 as FNCB was operating under its pandemic preparedness plan. With the reopening of the economy and FNCB branches fully operational, marketing initiatives have since resumed, which resulted in the increase in advertising costs for the second quarter of 2021. In comparing both the second quarter and year-to-date periods of 2021 and 2020, the increase in salaries and employee benefits was largely due to a decrease in the amount of payroll-related loan origination costs that are deferred and amortized over the life of the loan. The increase in data processing costs reflected added costs associated with a remote work environment, enhancements made to FNCB's digital banking services, including cybersecurity protection, and higher software costs. The year-over-year increase in regulatory assessments reflected the utilization of the remaining FDIC small bank assessment credits in 2020.
Provision for Income Taxes
FNCB recorded income tax expense of $2.1 million for the six months ended June 30, 2021, an increase of $855 thousand, or 68.0%, compared to income tax expense of $1.3 million for the same period of 2020. The increase in income tax expense primarily reflected an increase in pre-tax net income of $5.8 million, or 79.5%, when comparing the six months ended June 30, 2021 and 2020. Despite the increase in income tax expense, FNCB's effective tax rate decreased to 16.03% at June 30, 2021 compared to 17.13% for the period of 2020, which was primarily caused by higher levels of tax-exempt income and the bank-owned life insurance settlement, which is non-taxable.
FINANCIAL CONDITION
Assets
Total assets increased $59.1 million, or 4.0%, to $1.525 billion at June 30, 2021 from $1.466 billion at December 31, 2020. The change in total assets primarily reflected increases in net loans and available-for-sale debt securities, which were partially offset by a decrease in cash and cash equivalents. Net loans increased $75.1 million, or 8.4%, to $964.3 million at June 30, 2021 from $889.2 million at December 31, 2020, primarily due to the origination and funding of a second round of PPP loans, partially offset by first-round PPP loan forgiveness. Available-for-sale debt securities increased $82.8 million, or 23.6%, to $432.8 million at June 30, 2021 from $350.0 million at December 31, 2020, which primarily reflected the deployment of excess liquidity into the investment portfolio. Conversely, cash and cash equivalents decreased $99.9 million, or 64.1%, to $55.9 million at June 30, 2021 from $155.8 million at December 31, 2020. Total deposits increased $50.7 million, or 3.9%, to $1.338 billion at June 30, 2021 from $1.287 billion at December 31, 2020. Specifically, non-interest-bearing deposits increased $40.9 million, or 15.1%, due primarily to second round PPP loan funding and additional fiscal stimulus payments, coupled with an increase in interest-bearing deposits of $9.8 million, or 1.0%. Borrowed funds remained constant at $10.3 million at June 30, 2021 and December 31, 2020, comprised entirely of $10.3 million in FNCB's junior subordinated debentures.
Cash and Cash Equivalents
Cash and cash equivalents decreased $99.9 million, or 64.1%, to $55.9 million at June 30, 2021 from $155.8 million at December 31, 2020. The decrease was primarily due to the utilization of funds to purchase available-for-sale debt securities and fund loan growth. In addition, FNCB paid dividends totaling $0.120 per share for the six months ended June 30, 2021, an increase of 9.1% compared to dividends of $0.110 per share paid for the same period of 2020.
Securities
FNCB’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and interest income to increase profitability. Additionally, the investment securities portfolio is used to meet pledging requirements to secure public deposits and for other purposes. Debt securities are classified as either held-to-maturity or available-for-sale at the time of purchase based on management's intent. Held-to-maturity securities are carried at amortized cost, while available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a component of shareholders’ equity in accumulated other comprehensive income (loss), net of tax. At June 30, 2021 and December 31, 2020, all debt securities were classified as available-for-sale. Equity securities with readily determinable fair values are carried at fair value, with gains and losses due to fluctuations in market value included in the consolidated statements of income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. Management monitors the investment portfolio regularly. Decisions to purchase or sell investment securities are based upon management’s current assessment of long- and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies.
At June 30, 2021, FNCB's investment portfolio was comprised principally of available-for-sale debt securities including, fixed-rate, taxable and tax-exempt obligations of state and political subdivisions, and fixed-rate and floating-rate securities issued by U.S. government or U.S. government-sponsored agencies, which include mortgage-backed securities and residential and commercial collateralized mortgage obligations (“CMOs”). FNCB also holds investments, to a lesser extent, in private CMO's, corporate debt securities, asset-backed securities and U.S. Treasury securities. Additionally, FNCB holds equity investments in the common and preferred stock of certain publicly- and privately-traded bank holding companies. Except for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders’ equity at June 30, 2021.
The following table presents the carrying value of debt securities, all of which were classified as available-for-sale and carried at fair value at June 30, 2021 and December 31, 2020:
Composition of Available-for-Sale Debt Securities
| June 30, |
December 31, |
|||||||
| (in thousands) |
2021 |
2020 |
||||||
| Available-for-sale debt securities: |
||||||||
| U.S. Treasury securities |
$ | 5,124 | $ | - | ||||
| Obligations of state and political subdivisions |
215,389 | 205,828 | ||||||
| U.S. government/government-sponsored agencies: |
||||||||
| Collateralized mortgage obligations - residential |
107,000 | 56,972 | ||||||
| Collateralized mortgage obligations - commercial |
3,821 | 3,904 | ||||||
| Mortgage-backed securities |
19,976 | 13,026 | ||||||
| Private collateralized mortgage obligations |
41,247 | 38,199 | ||||||
| Corporate debt securities |
29,688 | 24,580 | ||||||
| Asset-backed securities |
10,562 | 7,526 | ||||||
| Total available-for-sale debt securities |
$ | 432,807 | $ | 350,035 | ||||
Activity related to available-for-sale debt securities within the investment portfolio during the first half of 2021 primarily reflected an asset/liability strategy to deploy a portion of excess cash into the investment portfolio to enhance net interest income. The deployment was the main factor contributing to a $82.8 million, or 23.6%, increase in available-for-sale debt securities to $432.8 million at June 30, 2021 from $350.0 million at December 31, 2020. Specifically, during the six months ended June 30, 2021, FNCB purchased 59 available-for-sale debt securities with an aggregate principal balance of $104.1 million and a weighted-average yield of 1.42%. The majority of the purchases were U.S. government-sponsored agency CMOs and taxable and tax-exempt obligations of state and political subdivisions. Security sales, principal repayments and a decrease in the market value of the available-for-sale portfolio due to an increase in market interest rates partially offset the increase due to the purchases. During the six months ended June 30, 2021, FNCB sold three taxable obligations of state and political subdivisions with an aggregate amortized cost of $2.8 million with a weighted-average yield of 2.78%. FNCB received gross proceeds of $3.0 million and realized a net gain of $213 thousand upon the sales, which is included in non-interest income.
Investment securities averaged $385.7 million for the six months ended June 30, 2021, an increase of $97.9 million, or 34.0%, from $287.8 million for the same six months of 2020. Taxable securities averaged $50.8 million, or 20.0%, higher, while average tax-exempt securities increased $47.1 million, or 147.5%. Moreover, the investment portfolio played a more prominent role in FNCB's mix of earning assets, as average investments comprised 28.5% of average earning assets for the year-to-date period ending June 30, 2021 compared to 24.5% for the same year-to-date period of 2020. The tax-equivalent yield on the investment portfolio decreased 20 basis points to 2.74% from 2.94% comparing the six months ended June 30, 2021 and 2020, respectively.
The majority of FNCB's debt securities are fixed-rate instruments and inherently subject to interest rate risk, as the value of the security fluctuates with changes in interest rates. U.S. Treasury rates rebounded somewhat during the first half of 2021. Specifically, the 2-year U.S. Treasury rate increased 12 basis points to 0.25% at June 30, 2021 from 0.13% at December 31, 2020, while the 10-year U.S. Treasury rate increased 54 basis points to 1.47% at June 30, 2021 from 0.93% at December 31, 2020. Generally, a security's value reacts inversely with changes in interest rates. Available-for-sale securities are carried at fair value, with unrealized gains or losses reported in the accumulated other comprehensive income component of shareholder's equity net of deferred income taxes. At June 30, 2021, FNCB reported net unrealized gains $11.2 million, net of deferred income taxes of $3.0 million, included accumulated other comprehensive income, a decrease of $2.8 million compared to net unrealized holding gains of $14.0 million, net of deferred income taxes of $3.7 million, at December 31, 2020.
Management continually monitors the investment portfolio for credit worthiness, value, and yield. Semi-annually, management engages a third-party consultant to review the municipal portfolio to determine if there is any undue credit risk within the portfolio. As part of the independent review, each security is compared to their Portfolio Credit Benchmark to identify which securities may contain more than a minimal risk of payment default. Based on their semi-annual review as of June 30, 2021, the third-party consultant concluded that each security held within the portfolio met or exceeded the benchmark and that none of the securities required further review. The next third-party review is scheduled for December 31, 2021. Management also monitors municipal securities monthly using a third-party Municipal Surveillance Report.
The following table presents the maturities of available-for-sale debt securities, based on carrying value at June 30, 2021 and the weighted-average yields of such securities calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. The yields on tax-exempt obligations of state and political subdivisions are presented on a tax-equivalent basis using the federal corporate income tax rate of 21.0%. Because residential, commercial and private collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary.
Maturity Distribution of Available-for-Sale Debt Securities
| June 30, 2021 |
||||||||||||||||||||||||
| (dollars in thousands) |
< 1 Year |
>1 - 5 Years |
6 - 10 Years |
Over 10 Years |
Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities |
Total |
||||||||||||||||||
| Available-for-sale debt securities: |
||||||||||||||||||||||||
| U.S. Treasury securities |
$ | - | $ | - | $ | 5,124 | $ | - | $ | - | $ | 5,124 | ||||||||||||
| Yield |
1.24 | % | 1.24 | % | ||||||||||||||||||||
| Obligations of state and political subdivisions |
4,674 | 66,766 | 19,706 | 124,243 | - | 215,389 | ||||||||||||||||||
| Yield |
2.42 | % | 2.96 | % | 2.81 | % | 2.81 | % | 2.85 | % | ||||||||||||||
| U.S. government/government-sponsored agencies: |
||||||||||||||||||||||||
| Collateralized mortgage obligations - residential |
- | - | - | - | 107,000 | 107,000 | ||||||||||||||||||
| Yield |
1.69 | % | 1.69 | % | ||||||||||||||||||||
| Collateralized mortgage obligations - commercial |
- | - | - | - | 3,821 | 3,821 | ||||||||||||||||||
| Yield |
1.98 | % | 1.98 | % | ||||||||||||||||||||
| Mortgage-backed securities |
- | - | - | - | 19,976 | 19,976 | ||||||||||||||||||
| Yield |
1.99 | % | 1.99 | % | ||||||||||||||||||||
| Private collateralized mortgage obligations |
- | - | - | - | 41,247 | 41,247 | ||||||||||||||||||
| Yield |
2.52 | % | 2.52 | % | ||||||||||||||||||||
| Corporate debt securities |
- | 1,006 | 28,682 | - | - | 29,688 | ||||||||||||||||||
| Yield |
6.50 | % | 4.90 | % | 4.95 | % | ||||||||||||||||||
| Asset-backed securities |
- | - | - | - | 10,562 | 10,562 | ||||||||||||||||||
| Yield |
1.45 | % | 1.45 | % | ||||||||||||||||||||
| Total available-for-sale debt securities |
$ | 4,674 | $ | 67,772 | $ | 53,512 | $ | 124,243 | $ | 182,606 | $ | 432,807 | ||||||||||||
| Weighted average yield |
2.42 | % | 3.01 | % | 3.78 | % | 2.81 | % | 1.90 | % | 2.57 | % | ||||||||||||
OTTI Evaluation
There was no OTTI recognized during the six months ended June 30, 2021 or 2020. For additional information regarding management’s evaluation of securities for OTTI, see Note 3, “Securities” of the notes to consolidated financial statements included in Item 1 to this Quarterly Report on Form 10-Q.
Restricted Securities
The following table presents the investment in FNCB’s restricted securities, which have limited marketability and are carried at cost, at June 30, 2021 and December 31, 2020:
| June 30, |
December 31, |
|||||||
| (in thousands) |
2021 |
2020 |
||||||
| Stock in Federal Home Loan Bank of Pittsburgh |
$ | 1,089 | $ | 1,735 | ||||
| Stock in Atlantic Community Banker's Bank |
10 | 10 | ||||||
| Total restricted securities, at cost |
$ | 1,099 | $ | 1,745 | ||||
Management noted no indicators of impairment for the Federal Home Loan Bank of Pittsburgh or Atlantic Community Banker’s Bank stock at June 30, 2021 and December 31, 2020.
Equity Securities
Included in equity securities with readily determinable fair values at June 30, 2021 and December 31, 2020 were investments in the common or preferred stock of publicly traded bank holding companies and an investment in a mutual fund comprised of 1-4 family residential mortgage-backed securities collateralized by properties within FNCB’s market area. The cost basis and fair value of equity securities totaled $3.4 million and $4.3 million, respectively, at June 30, 2021 and $2.5 million and $3.0 million, respectively, at December 31, 2020. During the first quarter of 2021, FNCB purchased investments in the common stock of two publicly-traded bank holding companies with an aggregate cost of $877 thousand. Equity securities with readily determinable fair values are reported at fair value with net unrealized gains and losses recognized in the consolidated statements of income. FNCB recognized net gains on equity securities included in non-interest income of $400 thousand for the six months ended June 30, 2021 and $18 thousand for the same six months of 2020.
Equity Securities without Readily Determinable Fair Values
At June 30, 2021 and December 31, 2020, equity securities without readily determinable fair values consisted of a $500 thousand investment in a fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company, which is included in other assets in the consolidated statement of financial condition. The preferred stock pays quarterly dividends at an annual rate of 8.25%, which commenced on March 30, 2021. The preferred stock of this bank holding company is not traded on any established market and is accounted for as an equity security without a determinable fair value. Under GAAP, 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. As part of its qualitative assessment, management engaged an independent third party to provide a valuation of this investment as of June 30, 2021, which indicated that the investment was not impaired. Management determined that no adjustment for impairment was required at June 30, 2021 and December 31, 2020.
Loans
Total loans, gross, increased $76.5 million, or 8.5%, to $979.8 million at June 30, 2021 from $903.3 million at December 31, 2020. The growth in the loan portfolio primarily reflected increases in residential and commercial real estate loans, commercial and industrial loans and loans to state and political subdivisions. Partially offsetting these increases were reductions in construction, land acquisition and development loans and consumer loans. With respect to commercial and industrial loans, on January 19, 2021, the SBA fully re-opened the loan portal and began accepting applications for a second round of PPP loans, which then ceased to accept applications on May 31, 2021. During the first half of 2021, FNCB originated and received funding for 679 PPP loans totaling $76.2 million. FNCB also continued to assist PPP customers in applying for forgiveness. As of June 30, 2021, PPP loans outstanding were $85.8 million, an increase of $7.2 million from $78.6 million outstanding at December 31, 2020. FNCB received forgiveness on PPP loans of $69.1 million during the six months ended June 30, 2021 and expects to receive forgiveness for the majority of the balance PPP loans outstanding by the end of 2021.
From a collateral standpoint, a majority of FNCB’s loan portfolio consists of loans secured by real estate. Real estate secured loans, which include commercial real estate, construction, land acquisition and development, residential real estate loans, increased $58.4 million, or 11.0%, to $588.4 million at June 30, 2021 from $530.0 million at December 31, 2020. The increase was concentrated in commercial real estate. Real estate secured loans represented 60.0% and 58.7% of gross loans at June 30, 2021 and December 31, 2020, respectively.
Commercial real estate loans increased $50.3 million, or 18.4%, to $324.2 million at June 30, 2021 from $273.9 million at December 31, 2020. Commercial real estate loans include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. Commercial and industrial loans, which consist primarily of equipment loans, working capital financing, revolving lines of credit and loans secured by cash and marketable securities and PPP loans,increased $9.8 million, or 4.1%, to $248.2 million at June 30, 2021 from $238.4 million at December 31, 2020. Construction, land acquisition and development loans decreased $6.2 million, or 10.2%, to $53.6 million at June 30, 2021 from $59.8 million at December 31, 2020.
Residential real estate loans include fixed-rate and variable-rate, amortizing mortgage loans, home equity term loans and home equity lines of credit ("HELOCs"). FNCB primarily underwrites fixed-rate residential mortgage loans for sale in the secondary market to reduce interest rate risk and provide funding for additional loans. Additionally, FNCB offers its proprietary “WOW” mortgage product, which is a non-saleable mortgage with maturity terms of 7.5 to 19.5 years that provides customers with an attractive fixed interest rate and low closing costs. Residential real estate loans totaled $210.5 million at June 30, 2021, an increase of $14.2 million, or 7.2%, from $196.3 million at December 31, 2020. The increase was largely due to strong demand for the WOW mortgage product, the balance of which increased $14.6 million, or 20.0%, to $87.5 million at June 30, 2021 from $72.9 million at December 31, 2020.
Consumer loans, which are primarily comprised of indirect automobile loans, decreased by $4.4 million, or 5.1%, to $81.5 million at June 30, 2021 from $85.9 million at December 31, 2020. Loans to state and political subdivisions increased $12.8 million, or 26.0%, to $61.8 million at June 30, 2021 from $49.0 million at December 31, 2020.
Loans, net of net deferred loan origination fees and unearned income, averaged $937.5 million for the six months ended June 30, 2021, an increase of $59.8million, or 6.8%, from $877.7 million for the same six months of 2020. Taxable loans averaged $63.8 million, or 7.7%, higher due largely to PPP loan originations. Conversely, average tax-exempt loans decreased $4.0 million, or 8.0%. Average loans comprised 69.3% of average earning assets for the year-to-date period ending June 30, 2021 compared to 74.9% for the same year-to-date period of 2020. The tax-equivalent yield on the loan portfolio increased 11 basis points to 4.31% from 4.20% comparing the six months ended June 30, 2021 and 2020, respectively, which reflected the recognition of $2.3 million in net loan origination fees for forgiven PPP loans and $0.2 million in net loan origination fees on the early payoff of two Main Street Lending Program loans.
The following table presents loans receivable, net by major category at June 30, 2021 and December 31, 2020:
Loan Portfolio Detail
| June 30, |
December 31, |
|||||||
| (in thousands) |
2021 |
2020 |
||||||
| Residential real estate |
$ | 210,493 | $ | 196,328 | ||||
| Commercial real estate |
324,239 | 273,903 | ||||||
| Construction, land acquisition and development |
53,659 | 59,785 | ||||||
| Commercial and industrial |
248,228 | 238,435 | ||||||
| Consumer |
81,459 | 85,881 | ||||||
| State and political subdivisions |
61,774 | 49,009 | ||||||
| Total loans, gross |
979,852 | 903,341 | ||||||
| Unearned income |
(268 | ) | (110 | ) | ||||
| Net deferred loan fees |
(3,046 | ) | (2,129 | ) | ||||
| Allowance for loan and lease losses |
(12,285 | ) | (11,950 | ) | ||||
| Loans, net |
$ | 964,253 | $ | 889,152 | ||||
Modifications Related to COVID-19
In late March 2020, the federal banking regulators issued guidance encouraging banks to work prudently with and provide short-term payment accommodations to borrowers affected by COVID-19. Additionally, Section 4013 of the CARES Act addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 do not need to be classified as TDRs. These modifications provided borrowers with a short-term, typically three-month, interest-only period or full payment deferral. The provisions under Section 4013 of the CARES Act originally were set to expire on December 31, 2020. The Consolidated Appropriations Act ("CAA") was signed into law on December 27, 2020. Section 541 of the CAA extended the provisions of Section 4013 of the CARES Act to January 1, 2022. Management closely monitors all loans for which a payment deferral has been granted and will continue to follow regulatory guidance when working with the borrowers which have been impacted by COVID-19 and apply the provisions of the CARES Act in making any TDR determinations. As of June 30, 2021, there were four loans with an aggregate recorded investment of $5.2 million that were still under deferral. The deferral period for all four loans are expected to expire in the third quarter of 2021, at which time the loans will return to their contracted payment terms.
Asset Quality
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by the ALLL. The ALLL is established through a provision for loan and lease losses charged to earnings.
FNCB has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of the Chief Lending Officer and loan officers, the Chief Credit Officer, the loan review function, and the Credit Risk Management, ALLL, Officers Loan and Directors Loan Committees, as well as through oversight of the Board of Directors. Management continually evaluates its credit risk management practices to ensure it is reacting to problems in the loan portfolio in a timely manner, although, as is the case with any financial institution, a certain degree of credit risk is dependent in part on local and general economic conditions that are beyond management’s control.
Under FNCB’s risk rating system, loans that are rated pass, special mention, substandard, doubtful, or loss are reviewed regularly as part of the risk management practices. The Credit Risk Management Committee, which consists of key members of management fromfinance, legal, lending and credit administration, meet monthly or more often as necessary to review individual problem credits and workout strategies and provides monthly reports to the Board of Directors.
A loan is considered impaired when it is probable that FNCB will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the note and loan agreement. For purposes of the analysis, all TDRs, loan relationships with an aggregate outstanding balance greater than $100 thousand rated substandard and non-accrual, and loans that are identified as doubtful or loss are considered impaired. Impaired loans are analyzed individually to determine the amount of impairment. For collateral-dependent loans, impairment is measured based on the fair value of the collateral supporting the loans. A loan is determined to be collateral dependent when repayment of the loan is expected to be provided through the liquidation of the collateral held. For impaired loans that are secured by real estate, collateral evaluations and external appraisals are obtained annually, or more frequently as warranted, to ascertain a fair value so that the impairment analysis can be updated. Should a collateral evaluation or current appraisal not be available at the time of impairment analysis, other sources of valuation may be used, including current letters of intent, broker price opinions or executed agreements of sale. For non-collateral-dependent loans, impairment is measured based on the present value of expected future cash flows, net of any deferred fees and costs, discounted at the loan’s original effective interest rate.
Loans to borrowers that are experiencing financial difficulty that are modified and result in the granting of concessions to the borrowers are classified as TDRs. Such concessions generally involve an extension of a loan’s stated maturity date, a reduction of the stated interest rate, payment modifications, capitalization of property taxes with respect to mortgage loans or a combination of these modifications. Non-accrual TDRs are returned to accrual status if principal and interest payments, under the modified terms, are brought current, are performing under the modified terms for six consecutive months, and management believes that collection of the remaining interest and principal is probable. FNCB conservatively considers all TDRs to be impaired.
Non-performing loans are monitored on an ongoing basis as part of FNCB’s loan review process. Additionally, work-out for non-performing loans and OREO are actively monitored through the Credit Risk Management Committee. A potential loss on a non-performing asset is generally determined by comparing the outstanding loan balance to the fair market value of the pledged collateral, less cost to sell.
Loans are placed on non-accrual when a loan is specifically determined to be impaired or when management believes that the collection of interest or principal is doubtful. This generally occurs when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection, or when management becomes aware of facts or circumstances that the loan would default before 90 days. FNCB determines delinquency status based on the number of days since the date of the borrower’s last required contractual loan payment. When the interest accrual is discontinued, all unpaid interest income is reversed and charged back against current earnings. Any subsequent cash payments received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts, with any excess treated as a recovery of lost interest. A non-accrual loan is returned to accrual status when the loan is current as to principal and interest payments, is performing according to contractual terms for six consecutive months and future payments are reasonably assured.
Management actively manages impaired loans in an effort to mitigate loss to FNCB by working with customers to develop strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means. In addition, management monitors employment and economic conditions within FNCB’s market area, as weakening of conditions could result in real estate devaluations and an increase in loan delinquencies, which could negatively impact asset quality and cause an increase in the provision for loan and lease losses.
Under the fair value of collateral method, the impaired amount of the loan is deemed to be the difference between the loan amount and the fair value of the collateral, less the estimated costs to sell. For real estate secured loans, management generally estimates selling costs using a factor of 10%, which is based on typical cost factors, such as a 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. If the valuation indicates that the fair value has deteriorated below the carrying value of the loan, the difference between the fair value and the principal balance is charged off. For impaired loans for which the value of the collateral less costs to sell exceeds the loan value, the impairment is determined to be zero.
The following table presents information about non-performing assets and accruing TDRs at June 30, 2021 and December 31, 2020:
Non-performing Assets and Accruing TDRs
| June 30, |
December 31, |
|||||||
| (dollars in thousands) |
2021 |
2020 |
||||||
| Non-accrual loans |
$ | 4,555 | $ | 5,581 | ||||
| Loans past due 90 days or more and still accruing |
- | - | ||||||
| Total non-performing loans |
4,555 | 5,581 | ||||||
| Other real estate owned |
236 | 58 | ||||||
| Other non-performing assets |
1,773 | 1,900 | ||||||
| Total non-performing assets |
$ | 6,564 | $ | 7,539 | ||||
| Accruing TDRs |
$ | 6,823 | $ | 6,975 | ||||
| Non-performing loans as a percentage of gross loans |
0.47 | % | 0.62 | % | ||||
FNCB's asset quality metrics continued to improve during the first half of 2021. Total non-performing assets decreased $975 thousand, or 12.9%, to $6.6 million at June 30, 2021 from $7.5 million at December 31, 2020. The improvement was attributable to a decrease in non-accrual loans, which primarily reflected the payoff of one commercial loan relationship, the return of two commercial loan relationships to accrual status and one residential property that was transferred to OREO. FNCB’s ratio of non-performing loans to total gross loans improved to 0.46% at June 30, 2021 from 0.62% at December 31, 2020. Additionally, FNCB’s ratio of non-performing assets as a percentage of shareholders’ equity improved to 4.1% at June 30, 2021 from 4.8% at December 31, 2020, due to the reduction in non-performing assets. While asset quality remained favorable, management believes continuing challenges from the COVID-19 pandemic could still have an adverse effect on asset quality in the future. Any further disruption to economic activity due to an acceleration in COVID-19 cases, and any related actions taken by governments, businesses or individuals, could result in increased loan delinquencies, defaults and collateral devaluations. Management actively manages problem credits through workout efforts focused on developing strategies to resolve borrower difficulties through liquidation of collateral and other appropriate means. Additionally, management continues to monitor non-accrual loans, delinquency trends and economic conditions within FNCB’s market area on an on-going basis in order to proactively address any collection-related issues and mitigate any potential losses.
Other non-performing assets was comprised solely of a classified account receivable, the balance of which was $1.8 million at June 30, 2021 and $1.9 million at December 31, 2020. The receivable is secured by an evergreen letter of credit that was received in 2011 as part of a settlement agreement for a large construction, land acquisition and development loan for a residential development project in the Pocono region of Monroe County, Pennsylvania. The agreement provides for payment to FNCB as real estate building lots are sold. The project was stalled due to a decline in real estate values in this area following the financial crisis of 2008. In 2019, economic development in this market area began improving and the developer for this project had resumed construction activity, including the completion of substantial infrastructure, and had increased marketing and sales initiatives related to the project. To date, no single-unit lots have been sold, however, the developer completed the construction of a seven-unit building that houses timeshare units and owners began occupying the units in the fourth quarter of 2020. In 2020, management negotiated a repayment plan with the developer. FNCB received the first payment of $127 thousand in the second quarter of 2021. Management continues to closely monitor this project. While the repayment plan has commenced, economic uncertainty and volatility associated with the COVID-19 pandemic are still unknown and could negatively impact the timing of sales and payments.
There were no loans modified as TDRs during the three and six months ended June 30, 2021. There were three commercial and industrial loans and one residential mortgage loan modified as TDRs during the three and six months ended June 30, 2020. The three commercial and industrial loans were modified under forbearance agreements and had an aggregate pre-and post-modification recorded investment of $196 thousand. The one residential mortgage loan that was modified as a TDR involved an extension of terms and the loan has a pre-and post-modification recorded investment of $88 thousand. There were no TDRs modified within the previous 12 months that defaulted during the three and six months ended June 30, 2021 and 2020.
The following table presents the changes in non-performing loans for the three and six months ended June 30, 2021 and 2020. Loan foreclosures represent recorded investment at time of foreclosure not including the effect of any guarantees.
Changes in Non-Performing Loans
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| (in thousands) |
2021 |
2020 |
2021 |
2020 |
||||||||||||
| Balance, beginning of period |
$ | 4,842 | $ | 8,576 | $ | 5,581 | $ | 9,084 | ||||||||
| Loans newly placed on non-accrual |
525 | 717 | 916 | 1,436 | ||||||||||||
| Loans returned to performing status |
(244 | ) | (1,521 | ) | (468 | ) | (1,569 | ) | ||||||||
| Loans transferred to OREO |
(133 | ) | - | (133 | ) | - | ||||||||||
| Loan foreclosures |
- | - | - | . | ||||||||||||
| Loans charged-off |
(125 | ) | (310 | ) | (471 | ) | (624 | ) | ||||||||
| Loan payments received |
(310 | ) | (722 | ) | (870 | ) | (1,587 | ) | ||||||||
| Balance, end of period |
$ | 4,555 | $ | 6,740 | $ | 4,555 | $ | 6,740 | ||||||||
The average balance of impaired loans was $11.3 million for both the three and six months ended June 30, 2021, compared to $14.8 million and $15.0 million, respectively, for the three and six months ended June 30, 2020. FNCB recognized $76 thousand and $154 thousand of interest income on impaired loans for the three and six months ended June 30, 2021, respectively and $98 thousand and $189 thousand for the respective periods of 2020.
The additional interest income that would have been earned on non-accrual and restructured loans had the loans been performing in accordance with their original terms for the three and six months ended June 30, 2021 approximated $55 thousand and $115 thousand, respectively, and $94 thousand and $205 thousand for the respective periods of 2020.
The following table presents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at June 30, 2021 and December 31, 2020:
Loan Delinquencies and Non-Accrual Loans
| June 30, |
December 31, |
|||||||
| 2021 |
2020 |
|||||||
| Accruing: |
||||||||
| 30-59 days |
0.08 | % | 0.31 | % | ||||
| 60-89 days |
0.01 | % | 0.06 | % | ||||
| 90+ days |
0.00 | % | 0.00 | % | ||||
| Non-accrual |
0.47 | % | 0.62 | % | ||||
| Total delinquencies |
0.56 | % | 0.99 | % | ||||
Total delinquent loans, including non-accrual loans, were $5.5 million, or 0.56% of gross loans, at June 30, 2021, compared to $8.9 million, or 0.99% of gross loans, at December 31, 2020. The improvement in delinquencies was due to primarily to a decrease in accruing loans past due 30-59 days of $1.9 million, coupled with decreases in non-accrual loans and accruing loans past due 60-89 days of $1.0 million and $0.5 million, respectively.
Allowance for Loan and Lease Losses
The ALLL represents management’s estimate of probable loan losses inherent in the loan portfolio. The ALLL is analyzed in accordance with GAAP and is maintained at a level that is based on management’s evaluation of the adequacy of the ALLL in relation to the risks inherent in the loan portfolio.
As part of its evaluation, management considers qualitative and environmental factors, including, but not limited to:
| • |
changes in national, local, and business economic conditions and developments, including the condition of various market segments; |
| • |
changes in the nature and volume of the loan portfolio; |
| • |
changes in lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices and results; |
| • |
changes in the experience, ability and depth of lending management and staff; |
| • |
changes in the quality of the loan review system and the degree of oversight by the Board of Directors; |
| • |
changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual loans, TDRs and other loan modifications; |
| • |
the existence and effect of any concentrations of credit and changes in the level of such concentrations; |
| • |
the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portfolio; and |
| • |
analysis of customers’ credit quality, including knowledge of their operating environment and financial condition. |
Evaluations are intrinsically subjective, as the results are estimated based on management knowledge and experience and are subject to interpretation and modification as information becomes available or as future events occur. Management monitors the loan portfolio on an ongoing basis with emphasis on weakness in both the real estate market and the economy in general and its effect on repayment. Adjustments to the ALLL are made based on management’s assessment of the factors noted above.
For purposes of management’s analysis of the ALLL, all loan relationships with an aggregate balance greater than $100 thousand that are rated substandard and non-accrual, identified as doubtful or loss, and all TDRs are considered impaired and are analyzed individually to determine the amount of impairment. Circumstances such as construction delays, declining real estate values, and the inability of the borrowers to make scheduled payments have resulted in these loan relationships being classified as impaired. FNCB utilizes the fair value of collateral method for collateral-dependent loans and TDRs for which repayment depends on the sale of collateral. For non-collateral-dependent loans and TDRs, FNCB measures impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. Regarding collateral-dependent loans, appraisals are received at least annually to ensure that impairment measurements reflect current market conditions. Should a current appraisal not be available at the time of impairment analysis, other valuation sources including current letters of intent, broker price opinions or executed agreements of sale may be used. Only downward adjustments are made based on these supporting values. Included in all impairment calculations is a cost to sell adjustment of approximately 10%, which is based on typical cost factors, including a 6% broker commission, 1% transfer taxes and 3% various other miscellaneous costs associated with the sales process. Sales costs are periodically reviewed and revised based on actual experience. The ALLL analysis is adjusted for subsequent events that may arise after the end of the reporting period but before the financial reports are filed.
The ALLL equaled $12.3 million at June 30, 2021, compared to $11.9 million at December 31, 2020. The slight increase resulted from $341 thousand in provisions for loan and lease losses for the six months ended June 30, 2021, which was slightly offset by $6 thousand in net charge-offs for the same time period. The ALLL consists of both specific and general components. The component of the ALLL that is related to impaired loans that are individually evaluated for impairment, the guidance for which is provided by ASC 310 “Impairment of a Loan” (“ASC 310”), was $250 thousand, or 2.0%, of the total ALLL at June 30, 2021, compared to $416 thousand, or 3.5%, of the total ALLL at December 31, 2020. A general allocation of $12.0 million was calculated for loans analyzed collectively under ASC 450 “Contingencies” (“ASC 450”), which represented 98.0% of the total ALLL of $12.3 million. Comparatively, at December 31, 2020, the general allocation for loans collectively analyzed for impairment amounted to $11.5 million, or 96.5%, of the total ALLL. Included in the general component of the ALLL was an unallocated reserve of $1.1 million, at both June 30, 2021 and December 31, 2020. Based on its evaluations, management may establish an unallocated component to cover any inherent losses that exist as of the evaluation date, but which may not have been identified under the methodology. The increase in the unallocated reserve was directly related to the increase in credit provisioning during the year ended December 31, 2020 due to the economic disruption caused by the COVID-19 pandemic. Based on its evaluation at June 30, 2021, management decided to maintain the unallocated component at a similar level to the level at December 31, 2020. As of June 30, 2021, FNCB has not experienced asset quality deterioration or an increase in credit losses related to the pandemic. However, management continues to monitor the loan portfolio for any potential adverse impact to FNCB's asset quality that may develop due to continuing challenges from the pandemic. The ratio of the ALLL to total loans decreased to 1.26% of total loans, net of net deferred loan origination fees and unearned income, of $976.5 million at June 30, 2021 from 1.33% of total loans, net of net deferred loan costs and unearned income, of $901.1 million at December 31, 2020. Excluding PPP loans, the ALLL as a percentage of gross loans equaled 1.37% at June 30, 2021 and 1.45% at December 31, 2020.
The following table presents an allocation of the ALLL by major loan category and percent of loans in each category to total loans at June 30, 2021 and December 31, 2020:
Allocation of the ALLL
| June 30, 2021 |
December 31, 2020 |
|||||||||||||||
| Percentage |
Percentage |
|||||||||||||||
| of Loans |
of Loans |
|||||||||||||||
| in Each |
in Each |
|||||||||||||||
| Category |
Category |
|||||||||||||||
| Allowance |
to Total |
Allowance |
to Total |
|||||||||||||
| (dollars in thousands) |
Amount |
Loans |
Amount |
Loans |
||||||||||||
| Residential real estate |
$ | 1,858 | 21.48 | % | $ | 1,715 | 21.73 | % | ||||||||
| Commercial real estate |
4,648 | 33.09 | % | 4,268 | 30.32 | % | ||||||||||
| Construction, land acquisition and development |
493 | 5.48 | % | 538 | 6.62 | % | ||||||||||
| Commercial and industrial |
2,483 | 25.33 | % | 2,619 | 26.39 | % | ||||||||||
| Consumer |
1,177 | 8.31 | % | 1,319 | 9.51 | % | ||||||||||
| State and political subdivision |
509 | 6.31 | % | 405 | 5.43 | % | ||||||||||
| Unallocated |
1,117 | - | 1,086 | - | ||||||||||||
| Total |
$ | 12,285 | 100.00 | % | $ | 11,950 | 100.00 | % | ||||||||
The following table presents an analysis of the ALLL by loan category for the three and six months ended June 30, 2021 and 2020:
Reconciliation of the ALLL
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
| (dollars in thousands) |
2021 |
2020 |
2021 |
2020 |
||||||||||||
| Balance at beginning of period |
$ | 12,076 | $ | 9,907 | $ | 11,950 | $ | 8,950 | ||||||||
| Charge-offs: |
||||||||||||||||
| Residential real estate |
6 | - | 6 | - | ||||||||||||
| Commercial real estate |
- | - | - | 56 | ||||||||||||
| Construction, land acquisition and development |
- | - | - | - | ||||||||||||
| Commercial and industrial |
11 | 92 | 30 | 127 | ||||||||||||
| Consumer |
119 | 224 | 461 | 462 | ||||||||||||
| State and political subdivisions |
- | - | - | - | ||||||||||||
| Total charge-offs |
136 | 316 | 497 | 645 | ||||||||||||
| Recoveries of charged-off loans: |
||||||||||||||||
| Residential real estate |
13 | 37 | 16 | 39 | ||||||||||||
| Commercial real estate |
- | 1 | 46 | 1 | ||||||||||||
| Construction, land acquisition and development |
- | - | - | - | ||||||||||||
| Commercial and industrial |
7 | 425 | 32 | 484 | ||||||||||||
| Consumer |
170 | 139 | 397 | 213 | ||||||||||||
| State and political subdivisions |
- | - | - | - | ||||||||||||
| Total recoveries |
190 | 602 | 491 | 737 | ||||||||||||
| Net (recoveries) charge-offs |
(54 | ) | (286 | ) | 6 | (92 | ) | |||||||||
| Provision for loan and lease losses |
155 | 831 | 341 | 1,982 | ||||||||||||
| Balance at end of period |
$ | 12,285 | $ | 11,024 | $ | 12,285 | $ | 11,024 | ||||||||
| Net (recoveries) charge-offs as a percentage of average loans |
(0.01 | )% | (0.03 | )% | - | (0.01 | )% | |||||||||
| Allowance for loan and lease losses as a percentage of loans, net |
1.26 | % | 1.16 | % | 1.26 | % | 1.16 | % | ||||||||
| Allowance for loan and lease losses as a percentage of loans, net at period end, excluding PPP Loans |
1.37 | % | 1.32 | % | 1.37 | % | 1.32 | % | ||||||||
Other Real Estate Owned
During the three and six months ended June 30, 2021, FNCB obtained a deed in lieu of foreclosure for a residential mortgage with a recorded investment of $138 thousand. FNCB accepted an offer of $205 thousand and the property went under an agreement of sale with closing anticipated in the third quarter of 2021. FNCB transferred the property to OREO at the selling price, less the estimated cost to sell, of $178 thousand and recorded a positive valuation adjustment of $40 thousand which is included in non-interest income for the three and six months ended June 30, 2021. Additionally, there was one residential mortgage loan with a recorded investment of $94 thousand that was in the process of foreclosure at June 30, 2021.
There were no residential real estate properties foreclosed upon during the three and six months ended June 30, 2020 or included in OREO at June 30, 2020.
FNCB actively markets OREO properties for sale through a variety of channels including internal marketing and the use of outside brokers/realtors. The carrying value of OREO is generally calculated at an amount not greater than 90% of the most recent fair market appraised value unless specific conditions warrant an exception. A 10% factor is generally used to estimate costs to sell, which is based on typical cost factors, such as 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. This fair value is updated on an annual basis or more frequently if new valuation information is available. Deterioration in the real estate market could result in additional losses on these properties.
Liabilities
Total liabilities consist primarily of total deposits and borrowed funds. During the first half of 2021, FNCB experienced strong deposit growth, which was the main factor contributing to a $54.3 million, or 4.1%, increase in total liabilities to $1.364 billion at June 30, 2021 from $1.310 billion at December 31, 2020. Total deposits were $1.338 billion at June 30, 2021, an increase of $50.7 million, or 3.9%, from $1.287 billion at December 31, 2020. Specifically, non-interest-bearing demand deposits increased $40.9 million, or 15.1%, to $312.4 million at June 30, 2021 from $271.5 million at December 31, 2020. The increase in non-interest-bearing deposits was related to the origination and funding of the second round of PPP loans, coupled with additional fiscal stimulus payments received by depositors in the first half of 2021. Interest-bearing deposits increased $9.8 million, or 1.0%, to $1.026 billion at June 30, 2021 from $1.016 billion at December 31, 2020, primarily due to the increase in savings and club accounts, which increased $16.3 million, or 14.9%, to $126.0 million at June 30, 2021 from $109.7 million at December 31, 2020. Additionally, interest-bearing demand deposits increased $8.3 million, or 1.2%, to $721.7 million at June 30, 2021, compared to $713.4 million at December 31, 2020. Partially offsetting these increases was a $14.8 million, or 7.7%, decrease in time deposits to $178.1 million at June 30, 2021 from $192.9 million at December 31, 2020. Comprised entirely of junior subordinated debentures, total borrowed funds remained constant at $10.3 million at June 30, 2021 and December 31, 2020. Due to the strong deposit influx and favorable liquidity position, FNCB had no advances through the FHLB of Pittsburgh outstanding at June 30, 2021 and December 31, 2020.
Equity
Total shareholders’ equity increased $4.7 million, or 3.1%, to $160.6 million at June 30, 2021 from $155.9 million at December 31, 2020. Book value per common share was $7.99 at June 30, 2021, an increase of $0.29, or 3.8%, compared to $7.70 at December 31, 2020. The increase in capital was primarily due to net income for the six months ended June 30, 2021 of $11.1 million, partially offset by $2.4 million in dividends declared and paid for the six months ended June 30, 2021, and a $2.7 million decrease in accumulated other comprehensive income related primarily to the depreciation in the fair value of FNCB's available-for-sale debt securities, net of deferred taxes.
Additionally, on January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program under which up to 975,000 shares of FNCB's outstanding common stock may be acquired in the open market. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan, and the repurchased shares will be returned to the status of authorized but unissued shares of Common Stock. During the six months ended June 30, 2021, FNCB repurchased 193,530 shares at a weighted-average price per share of $7.18, or $1.4 million in aggregate. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue at any time that management determines additional repurchases are no longer warranted.
The Bank's total regulatory capital increased $12.2 million to $161.4 million at June 30, 2021 from $149.2 million at December 31, 2020. FNCB Bank's total risk-based capital and Tier 1 leverage ratios were 15.79% and 9.90% at June 30, 2021, respectively, compared to 15.79% and 9.57% at December 31, 2020, respectively. The Bank's risk-based capital ratios exceeded the minimum regulatory capital ratios required for well capitalized under prompt corrective action regulations. Based on the most recent notification from its primary regulator, the Bank was considered well capitalized at June 30, 2021 and December 31, 2020. There were no conditions or events since that notification that management believes would have changed this capital designation.
Liquidity
The term liquidity refers to the ability to generate sufficient amounts of cash to meet cash flow needs. Liquidity is required to fulfill the borrowing needs of FNCB’s credit customers and the withdrawal and maturity requirements of its deposit customers, as well as to meet other financial commitments. FNCB’s liquidity position is impacted by several factors, which include, among others, loan origination volumes, loan and investment maturity structure and cash flows, deposit demand and time deposit maturity structure and retention. FNCB has liquidity and contingent funding policies in place that are designed with controls in place to provide advanced detection of potentially significant funding shortfalls, establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate a potential liquidity crisis. Management monitors FNCB’s liquidity position and fluctuations daily, forecasts future liquidity needs, performs periodic stress tests on its liquidity levels and develops strategies to ensure adequate liquidity at all times. Additionally, management regularly monitors FNCB's wholesale funding sources taking into consideration the cost of funds, diversification between funding sources and asset/liability management strategies. FNCB utilizes brokered deposits, including one-way purchases through the IntraFi® Network, deposits acquired through a national listing service, as well as overnight and term advances through the FHLB of Pittsburgh as wholesale sources of funds to supplement its deposit gathering initiatives.
The statements of cash flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and interest-bearing deposits in other banks, which comprise cash and cash equivalents, are FNCB’s most liquid assets. At June 30, 2021, cash and cash equivalents totaled $55.9 million, a decrease of $99.9 million compared to $155.8 million at December 31, 2020. For the six months ended June 30, 2021 net cash inflows from operating and financing activities were more than entirely offset by net cash used in investing activities during that same time frame. Regarding FNCB's operating activities, net income, net of reconciling adjustments, for the six months ended June 30, 2021 provided net cash of $10.4 million. Financing activities provided $46.9 million in net cash for the six months ended June 30, 2021, which resulted primarily from the net increase in total deposits of $50.7 million. These net cash inflows were more than entirely offset by the $157.2 million in net cash used in FNCB's investing activities for the six months ended June 30, 2021. Specifically, cash used for purchases of available-for-sale debt securities and equity securities of $99.6 million and $0.9 million, respectively, coupled with a net increase in loans to customers of $73.0 million, primarily PPP originations, were the primary contributors to the net cash used in investing activities. Partially offsetting these outflows were cash received from sales, maturities, calls and repayments of available-for-sale debt securities totaling $17.1 million.
Management is actively monitoring FNCB's liquidity position and capital adequacy in light of the changing circumstances related to economic uncertainty brought on by the COVID-19 pandemic. While management believes FNCB's liquidity position is favorable, they are keenly aware that changes in economic conditions related to COVID-19, or in general, could pose potential stress on liquidity should deposits begin exiting the Bank or FNCB's asset quality deteriorates. Additionally, FNCB could experience an increase in the utilization of existing lines of credit as customers manage their own liquidity needs during this time of economic uncertainty. Despite the $99.9 million decrease in cash and cash equivalents from December 31, 2020, management believes FNCB's current liquidity position and available sources of liquidity were sufficient to meet its cash flow needs and fulfill its obligations at June 30, 2021. In addition to cash and cash equivalents of $55.9 million at June 30, 2021, FNCB had ample sources of additional liquidity including approximately $316.3 million in available borrowing capacity from the FHLB of Pittsburgh and $14.5 million under the borrower-in-custody program. FNCB also has available unsecured federal funds lines of credit totaling $47.0 million at June 30, 2021.
Interest Rate Risk
Interest Rate Sensitivity
Market risk is the risk to earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. FNCB’s exposure to market risk is primarily interest rate risk associated with our lending, investing and deposit gathering activities, all of which are other than trading. Changes in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. In addition, variations in interest rates affect the underlying economic value of our assets, liabilities and off-balance sheet items.
LIBOR Replacement
The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. ARRC had initially proposed that the transition to SOFR from USD-LIBOR would take place by the end of 2021. At the end of 2020, the ICE Benchmark Administration ("IBA"), which complies and oversees LIBOR, commenced a consultation on its intention to extend most of the USD-LIBOR tenors to June 30, 2023, and U.S. banking regulators have expressed support for the extension. Results of the consultation, which concluded on January 25, 2021, reaffirmed the extension of the overnight, 1-, 3-, 6- and 12-month LIBOR tenors through June 30, 2023. FNCB has various loans, investments, borrowings and interest rate swap contracts that are indexed to USD-LIBOR, and management is actively monitoring its LIBOR exposures and evaluating the risks involved.
Asset and Liability Management
The ALCO, comprised of members of the Bank's board of directors, executive management and other appropriate officers, oversees FNCB's interest rate risk management program. Members of ALCO meet quarterly, or more frequently as necessary, to develop balance sheet strategies affecting the future level of net interest income, liquidity and capital. The major objectives of ALCO are to:
The major objectives of ALCO are to:
| ● |
manage exposure to changes in the interest rate environment by limiting the changes in net interest margin to an acceptable level within a reasonable range of interest rates; |
| ● |
ensure adequate liquidity and funding; |
| ● |
maintain a strong capital base; and |
| ● |
maximize net interest income opportunities. |
FNCB utilizes the pricing and structure of loans and deposits, the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, and off-balance sheet interest rate contracts to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk.
ALCO monitors FNCB’s exposure to changes in net interest income over both a one-year planning horizon and a longer-term strategic horizon. ALCO uses net interest income simulations and economic value of equity (“EVE”) simulations as the primary tools in measuring and managing FNCB’s position and considers balance sheet forecasts, FNCB's liquidity position, the economic environment, anticipated direction of interest rates and FNCB’s earnings sensitivity to changes in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable negative changes in net interest income. Furthermore, as part of its ongoing monitoring, ALCO requires quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques.
Earnings at Risk and Economic Value at Risk Simulations
Earnings at Risk
Earnings-at-risk simulation measures the change in net interest income and net income under various interest rate scenarios. Specifically, given the current market rates, ALCO looks at “earnings at risk” to determine anticipated changes in net interest income from a base case scenario with scenarios of +200, +400, and -100 basis points for simulation purposes. The simulation takes into consideration that not all assets and liabilities re-price equally and simultaneously with market rates (i.e., savings rate).
Economic Value at Risk
While earnings-at-risk simulation measures the short-term risk in the balance sheet, economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from FNCB’s existing assets and liabilities. ALCO examines this ratio regularly, and given the current rate environment, has utilized rate shocks of +200, +400, and -100 basis points for simulation purposes. Management recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.
While ALCO regularly performs a wide variety of simulations under various strategic balance sheet and treasury yield curve scenarios, the following results reflect FNCB’s sensitivity over the subsequent twelve months based on the following assumptions:
| ● |
asset and liability levels using June 30, 2021 as a starting point; |
| ● |
cash flows are based on contractual maturity and amortization schedules with applicable prepayments derived from internal historical data and external sources; and |
| ● |
cash flows are reinvested into similar instruments so as to keep interest-earning asset and interest-bearing liability levels constant. |
The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points, +200 basis points, and -100 basis points on net interest income and the change in economic value over a one-year time horizon from the June 30, 2021 levels:
| Rates +200 |
Rates +400 |
Rates -100 |
||||||||||||||||||||||
| Simulation Results |
Policy Limit |
Simulation Results |
Policy Limit |
Simulation Results |
Policy Limit |
|||||||||||||||||||
| Earnings at risk: |
||||||||||||||||||||||||
| Percent change in net interest income |
(0.4 | )% | (12.5 | )% | 1.0 | % | (20.0 | )% | (2.7 | )% | (10.0 | )% | ||||||||||||
| Economic value at risk: |
||||||||||||||||||||||||
| Percent change in economic value of equity |
1.9 | % | (20.0 | )% | 1.3 | % | (35.0 | )% | (23.6 | )% | (10.0 | )% | ||||||||||||
Similar to model results at March 31, 2021, results from the simulation at June 30, 2021 indicated that FNCB's asset/liability position was relatively well matched in the near term, exhibiting only minor sensitivity to changes in interest rates over the next twelve months. According to the model results at June 30,2021, net interest income is expected to decrease 0.4% under a +200-basis point interest rate shock and decrease 2.7% under a -100-basis point rate shock, Additionally, under a parallel shift in interest rates of +200 basis points, FNCB's economic value of equity ("EVE") is expected to increase 1.9%. However, EVE is expected to decrease 23.6% under a parallel shift in interest rates of -100 basis points, which is outside of ALCO policy guidelines. With the exception of the -100 basis point rate shock on EVE, all modeled exposures of net interest income and EVE were within internal policy guidelines for the next twelve months. Management does not believe that EVE policy exception under the -100-basis point rate shock poses any undue interest rate risk at June 30, 2021. Included in the model was the assumptions that FNCB would receive forgiveness for PPP loans outstanding at June 30, 2021 and recognize the associated loan origination fees to interest income by the end of the first year of the model. Accordingly, results of model project a substantial decrease to net interest income in Year 2 of the model based on these assumptions.
This analysis does not represent a forecast for FNCB and should not be relied upon as being indicative of expected operating results. These simulations are based on numerous assumptions, including but not limited to: the nature and timing of interest rate levels, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacements of asset and liability cash flows, and other factors. While assumptions reflect current economic and local market conditions, FNCB cannot make any assurances as to the predictive nature of these assumptions, including changes in interest rates, customer preferences, competition and liquidity needs, or what actions ALCO might take in responding to these changes. In response to the economic disruption and uncertainty brought on by the COVID-19 pandemic, the FOMC lowered the federal funds target rate a total of 150 basis points in two emergency actions with an expectation that the Committee will maintain a low interest rate environment for the foreseeable future. Given FNCB's current asset/liability position, the significantly lower market interest rates may have a negative impact on FNCB's earning asset yields and variable-rate loans and securities indexed to prime and LIBOR will continue to reprice downward.
As previously mentioned, as part of its ongoing monitoring, ALCO requires quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques. As part of its quarterly review, management compared tax-equivalent net interest income recorded for the three months ended June 30, 2021 with tax-equivalent net interest income that was projected for the same three-month period. There was a positive variance between actual and projected tax-equivalent net interest income for the three-month period ended June 30, 2021 of approximately $0.4 million, or 2.9%. The variance primarily reflected additional loan growth actually experienced over that used in the model. ALCO performs a detailed rate/volume analysis between actual and projected results in order to continue to improve the accuracy of its simulation models.
Off-Balance Sheet Arrangements
In the ordinary course of operations, FNCB engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions may be used for general corporate purposes or for customer needs. Corporate purpose transactions would be used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding.
For the three and six months ended June 30, 2021, FNCB did not engage in any off-balance sheet transactions that would have or would be reasonably likely to have a material effect on its consolidated financial condition.
Item 3 — Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in FNCB’s exposure to market risk during the six months ended June 30, 2021. For discussion of FNCB’s exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in FNCB’s Form 10-K for the year ended December 31, 2020.
Item 4 — Controls and Procedures
FNCB’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of FNCB’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, FNCB’s Chief Executive Officer and Chief Financial Officer concluded FNCB’s disclosure controls and procedures were effective as of June 30, 2021.
There were no changes made to FNCB’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, FNCB’s internal control over financial reporting.
FNCB has been subject to tax audits, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims, workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of FNCB.
There have been no changes in the status of the other litigation, if any, disclosed in FNCB’s Annual Report on Form 10-K for the year ended December 31, 2020.
There have been no material changes in the risk factors previously disclosed in FNCB's Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
FNCB did not issue any unregistered equity securities during the six months ended June 30, 2021.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Pursuant to the share repurchase program initially announced by FNCB on January 27, 2021, which expires on December 31, 2021, FNCB may repurchase up to 975,000 shares of its issued and outstanding common stock. The share repurchase program is intended to comply with the provisions of the safe harbor under Rule 10b-18 of the Exchange Act. The following table describes purchases by FNCB under the share repurchase program that settled during each period set forth in the table. Prices in column (b) include commissions. Cumulatively, as of June 30, 2021, FNCB had repurchased 193,530 of its shares under the program at a weighted average purchase price of $7.05 per share, or $1.4 million thousand in aggregate (including commissions). As of June 30, 2021, FNCB had the authority to repurchase an additional 781,470 shares under the stock repurchase program.
| Total Number |
Maximum |
|||||||||||||||
| of Shares |
Number of |
|||||||||||||||
| Purchased as |
Shares that |
|||||||||||||||
| Total Number |
|
Part of Publicly |
May Yet be |
|||||||||||||
| of Shares |
Average Price |
Announced |
Purchased under |
|||||||||||||
| Purchased |
Paid Per Share |
Programs |
the Program |
|||||||||||||
| Period |
(a) |
(b) |
(c) |
(d) |
||||||||||||
| January 27, 2021 to January 31, 2021 |
- | $ | - | - | 975,000 | |||||||||||
| February 1, 2021 to February 28, 2021 |
8,188 | 6.96 | 8,188 | 966,812 | ||||||||||||
| March 1, 2021 to March 31, 2021 |
- | - | - | 966,812 | ||||||||||||
| April 1, 2021 to April 30, 2021 |
17,889 | 6.94 | 17,889 | 948,923 | ||||||||||||
| May 1, 2021 to May 31, 2021 |
21,780 | 7.04 | 21,780 | 927,143 | ||||||||||||
| June 1, 2021 to June 30, 2021 |
145,673 | 7.24 | 145,673 | 781,470 | ||||||||||||
| Total |
193,530 | $ | 7.05 | 193,530 | 781,470 | |||||||||||
Item 3 - Defaults upon Senior Securities.
None.
Item 4 — Mine Safety Disclosures.
Not applicable.
None.
The following exhibits are filed or furnished herewith or incorporated by reference.
| * |
Filed herewith |
| ** |
Furnished herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Registrant: FNCB BANCORP, INC.
| Date: August 6, 2021 |
By: |
/s/ Gerard A. Champi |
| Gerard A. Champi |
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| President and Chief Executive Officer |
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| Date: August 6, 2021 |
By: |
/s/ James M. Bone, Jr. |
| James M. Bone, Jr., CPA |
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| Executive Vice President and Chief Financial Officer |
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| Principal Financial Officer |
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| Date: August 6, 2021 |
By: |
/s/ Stephanie A. Westington |
| Stephanie A. Westington, CPA |
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| Senior Vice President and Controller |
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| Principal Accounting Officer |
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