FNCB BANCORP, INC.
CHARTING A COURSE FOR SUCCESS
2016 ANNUAL REPORT
TABLE OF CONTENTS
Shareholder Letter
FNCB Bancorp, Inc. Directors & Officers
FNCB Bank Officers
FNCB Bank & Locations
2
14
14
16
To Our Loyal Customers, Shareholders and Friends:
We are pleased to report that 2016 was a very successful, as well as a transitional year for FNCB. In June
2016, the Bank underwent a seamless conversion from a national bank to a Pennsylvania state bank
and officially changed its name from First National Community Bank to FNCB Bank. Soon afterward,
the holding company changed its name to FNCB Bancorp, Inc. We believe our new identity as a
state-chartered institution provides us with greater flexibility to execute strategies for long-term
growth in the future. FNCB remains a member of the FDIC and we are committed to offering and
delivering the same high level products and quality service our customers value.
Another transition that took place in 2016 was the appointment of long-time executive Gerard A.
Champi as President and Chief Executive Officer following the retirement of Steven R. Tokach. Steve
joined FNCB in 2011 when we were facing significant regulatory and financial challenges. His leadership
was the light that allowed us to successfully navigate rough waters and become a much stronger
institution. We will remain forever grateful for his leadership, and on behalf of the entire FNCB team we
wish him a happy, healthy and well-deserved retirement.
2016 ANNUAL REPORT | 2
FNCB BANCORP, INC. and SUBSIDIARIES
Charting a Course for Success
Looking back, we began 2016 by charting a course for success that involved strengthening our
balance sheet, creating long-term, meaningful value for our shareholders, improving financial
performance and positioning our company for future opportunities. Our first initiatives in 2016,
following the reversal of the deferred tax asset (“DTA”) valuation allowance at the end of 2015, was to
make the holders of our subordinated notes whole with respect to deferred and unpaid interest. On
March 1, 2016, we paid $10.8 million, the entire balance, of deferred interest owed to these stakeholders,
effectively strengthening the balance sheet by reducing leverage. Shortly after curing the deferred
interest, we resumed paying a quarterly shareholder dividend with the payment of a $0.02 per share
dividend on March 15, 2016, our first quarterly dividend to shareholders since the fourth quarter of
2009. In addition, effective with the payment of the second quarter 2016 dividend, we reinstated our
dividend reinvestment and optional cash purchase plans. These plans provide shareholders the
opportunity to reinvest dividends and/or purchase additional shares of FNCB stock at a discounted
price. Dividends declared and paid in 2016 totaled $0.09 per share, equating to an annual yield of 1.5%
and total return of 17.0%, based on the closing stock prices of $6.05 per share at December 31, 2016
and $5.25 per share at December 31, 2015.
FNCB Bank's Executive Team L-R: Gerard A. Champi, President and Chief Executive Officer; Brian C. Mahlstedt, Executive Vice President, Chief Lending
Officer; Mary G. Cummings, Senior Vice President, General Counsel; and James M. Bone, Jr., CPA, Executive Vice President, Chief Financial Officer.
FNCB BANCORP, INC. and SUBSIDIARIES
2016 ANNUAL REPORT | 3
Solid Financial Performance
We reported net income for 2016 of $6.3 million, or $0.38 per basic and diluted share. The positive
results in 2016, followed net income achieved in 2015 of $35.8 million, or $2.17 per basic and diluted
share, which included the reversal of the valuation allowance for DTA, and marked the fourth
consecutive profitable year for FNCB. Cumulative net income for fiscal years 2013 through 2016
totaled $62.0 million! Our results for 2016 were also impacted by strong improvement in net interest
income and continued reductions in non-interest expense levels.
Net interest income improved $3.1 million, or 11.5%, to $30.5 million in 2016 from $27.4 million in 2015,
reflecting solid growth in interest-earning assets, higher yields on loans and investments and lower
funding costs. Average earning assets grew $58.4 million, or 6.2%, to $1.0 billion in 2016 from $942.1
million in 2015. The average yield earned on these assets advanced five basis points, while our cost to
fund these assets decreased 11 basis points to 0.50% in 2016 from 0.61% in 2015. We realized a full
year of interest savings resulting from an $11.0 million principal payment and a 450-basis point rate
reduction on our subordinated debt balance completed in 2015.
4-YEAR CUMULATIVE NET INCOME
(dollars in thousands)
2016
$6,309
2015
$35,840
$61,951
2014
$13,420
2013
$6,382
2016 ANNUAL REPORT | 4
FNCB BANCORP, INC. and SUBSIDIARIES
TAX-EQUIVALENT YIELD ON EARNINGS ASSETS
COST OF FUNDS
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
4.27%
4.04%
3.75%
3.50%
3.55%
1.12%
0.94%
0.80%
0.61%
0.50%
TAX-EQUIVALENT NET INTEREST MARGIN
EFFICIENCY RATIO (FNCB Bank)
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
3.26%
3.21%
3.13%
115.15%
3.08%
2.99%
87.46%
84.71%
79.67%
72.76%
We continued to realize improvement in our non-interest expense levels as our risk profile also
exhibited improvement. Total non-interest expense decreased $0.9 million, or 3.2%, to $27.5 million in
2016 from $28.5 million in 2015, reflecting lower occupancy costs, regulatory assessments and
insurance expense.
Higher net interest income and reduced operating expense levels led to greater operating efficiency
as reflected in an improvement in FNCB Bank’s efficiency ratio to 72.76% in 2016 from 79.67% in 2015.
Management considers operating efficiency to be a main driver of our overall financial performance
and we continually monitor this key industry metric to gauge our success. While we have made great
strides in improving efficiency, when we compare FNCB to our peers, we realize we still have work to
do. The industry average for banks with total assets between $1.0 billion and $3.0 billion was 63.70%
in 2016. Improvement in our operating efficiency will continue to be one of our foremost goals.
FNCB BANCORP, INC. and SUBSIDIARIES
2016 ANNUAL REPORT | 5
NON-PERFORMING LOANS/TOTAL LOANS
TOTAL DEPOSITS (dollars in thousands)
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
1.62%
0.99%
0.82%
$884,698
$854,613
$795,336
$821,546
$1,015,139
0.52%
0.31%
Positioned for the Future
Strong deposit growth, coupled with an influx of public funds at the end of 2016, led to a $91.4 million
increase in cash and cash equivalents and an overall increase in total assets of $104.8 million, or 9.6%.
We realized continued improvement in our asset quality as evidenced by a 41.0% reduction in
non-performing loans. In addition, our capital position strengthened as total shareholders’ equity
advanced $4.0 million, or 4.6%, and tangible book value improved $0.21 per share, or 4.0%. We also
saw improvement in our risk-based capital ratios, as the total risk-based capital and leverage ratios
improved to 12.06% and 7.53% at December 31, 2016 from 11.79% and 7.27% at December 31, 2015,
respectively.
TOTAL ASSETS (dollars in thousands)
TANGIBLE BOOK VALUE PER SHARE
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
$1,003,808
$968,274
$970,029
$1,090,618
$1,195,375
$5.21
$5.42
$3.10
$2.21
$2.01
2016 ANNUAL REPORT | 6
FNCB BANCORP, INC. and SUBSIDIARIES
DEPOSIT COMPOSITION
(dollars in thousands)
Non-interest bearing demand
Interest-bearing demand
NOW
Public Funds
Money Market
Savings
Time
2016
2015
2.8%
2.1%
$
$
$
$
$
$
$
173,702
28,538
88,975
303,941
129,660
103,241
187,082
$1,015,139
18.4%
17.1%
10.2%
8.8%
12.8%
29.9%
$
$
$
$
$
$
$
154,531
17,313
82,638
97,417
166,935
92,890
209,822
$
821,546
25.5%
18.8%
10.1%
11.9%
11.3%
20.3%
The formation of a governmental banking department, targeted collaboration between the Bank’s retail
and commercial banking units, and new consumer product offerings all factored into nearly 24.0%
growth in total deposits. We experienced double-digit growth in both interest-bearing and
non-interest-bearing deposits. Adding the governmental banking department directly resulted in
growth in municipal deposits of $206.5 million, or 212.0%. The collaboration between our retail banking
and commercial lending units to develop deposit relationships with customers with already established
loan relationships influenced growth in non-interest bearing demand accounts of $19.2 million, or 12.4%,
and NOW accounts of $6.3 million, or 7.7%. During the second quarter of 2016, we launched our new
“Wow ME” suite of products including high-yield and cash-back checking and savings accounts. These
new deposit solutions, which complement our already popular Wow Mortgage product, contributed to
the $11.2 million, or 64.8%, growth in interest-bearing demand accounts and $10.4 million, or 11.3%,
growth in savings accounts. We used the funds from deposit growth to reduce our reliance on wholesale
funding, as we paid down advances with the FHLB of Pittsburgh by $77.3 million, and funded net
increases in loans and investment securities of $0.9 million and $18.9 million, respectively.
The formation of a governmental banking department, target collaboration
between the Bank’s retail and commercial banking units, and new customer
offerings factored into nearly 24% growth in total deposits.
FNCB BANCORP, INC. and SUBSIDIARIES
2016 ANNUAL REPORT | 7
On the Horizon
In our rapidly changing industry, our Board of Directors and management team continually monitor
and evaluate our infrastructure and delivery systems to ensure we can meet the evolving needs of our
customers.
Along these lines, we are happy to announce FNCB Bank expanded into the growing Lehigh Valley
market with the opening of a Limited Purpose Office (LPO) in Allentown, Pennsylvania in January
2017. We are excited to enter this new marketplace and introduce not only our retail and commercial
lending solutions to this community, but our commitment to unsurpassed customer service. Also in
the first quarter of 2017, FNCB Bank opened a lending center in the building directly adjacent to our
main office in Dunmore, Pennsylvania to house part of our commercial and retail lending units. We
believe this location will enhance customer service and further emphasize commercial and retail
lending collaborative efforts to increase customer wallet share.
Looking ahead, we will continue to evaluate our delivery systems including our physical branch
network, administrative offices, along with our online and mobile banking platforms and other
evolving technologies.
2016 ANNUAL REPORT | 8
FNCB BANCORP, INC. and SUBSIDIARIES
Coming together is a beginning,
keeping together is progress
and working together is success.
HENRY FORD
Community Impact
To us, being a community bank means just that. It means that we are called to play an active role to make
an impact, both financially and through service, in the communities we serve. We are proud to say this is
a calling each and every member of FNCB takes to heart. In 2016, FNCB employees volunteered 676
hours of their time at 42 not-for-profit agencies in our area. In addition, FNCB donated more than
$300,000 to area charitable, not-for-profit, educational improvement and scholarship organizations.
676
Volunteer Hours
FNCB employees
volunteered their
time at 42 area
not-for-profit
agencies.
42
Not-For-Profit
Agencies
FNCB partners with
local, not-for-profit
agencies that benefit
the needs of our
community.
$300,000
Donations
FNCB is proud to assist the area’s
charitable, not-for-profit, educational
improvement and scholarship
organizations by donating over
$300,000 in 2016.
2016 ANNUAL REPORT | 10
FNCB BANCORP, INC. and SUBSIDIARIES
There is no strength without unity.
IRISH PROVERB
Sometimes You’ve Gotta Say Wow!
Our financial achievements and community involve-
ment did not go unnoticed. In December 2016, we were
proud to announce that FNCB Bank earned a 5-star
“Superior” rating from BauerFinancial, a leading national
independent bank and credit union rating and research
firm. The ratings are on a scale of zero to five and are
based on several factors including: capital ratios,
profitability trends, asset quality and community
reinvestment, among others. In addition, we would like
to say THANK YOU to everyone who voted FNCB Bank
“Best Bank” and “Best Place to Work” in the Scranton
Times-Tribune Readers’ Choice Awards!
Dominick L. DeNaples
Chairman of the Board
Gerard A. Champi
President and CEO
It’s been said, “There is no strength without unity.” We realize our successes
in 2016 would not have been achieved without the hard work
and dedication of our entire FNCB crew!
It’s been said, “There is no strength without unity.” We realize our success in 2016 would not have been
achieved without the hard work and dedication of our entire FNCB crew! From the strong leadership of
our Board of Directors and management, to the face-to-face customer interaction of our retail, commer-
cial and government banking units and the support from our operational and administrative units;
success is achieved when each member has their oars in the water, rowing together in the same direction!
Most importantly, our success could not have been achieved without the unwavering support of you: our
shareholders, our customers and our community. Thank you for making FNCB Simply a Better Bank!
Sincerely,
Dominick L. DeNaples
Chairman of the Board
Gerard A. Champi
President and Chief Executive Officer
FNCB BANCORP, INC. and SUBSIDIARIES
2016 ANNUAL REPORT | 13
FNCB Bancorp, Inc.
Officers & Directors
OFFICERS
Dominick L. DeNaples
Chairman of the Board
Dr. Louis A. DeNaples, Jr.
Vice Chairman of the Board
Gerard A. Champi
President and
Chief Executive Officer
Joseph Coccia
Secretary
James M. Bone, Jr., CPA
Executive Vice President,
Chief Financial Officer,
Treasurer
DIRECTORS
William G. Bracey
Gerard A. Champi
Joseph Coccia
Dominick L. DeNaples
Louis A. DeNaples
Dr. Louis A. DeNaples, Jr.
Keith W. Eckel
Thomas J. Melone, CPA
John P. Moses, Esquire
FNCB Bank | Directors
Dominick L. DeNaples
Chairman of the Board
Dr. Louis A. DeNaples, Jr.
Vice Chairman of the Board
Gerard A. Champi
President and
Chief Executive Officer
Joseph Coccia
Secretary
William G. Bracey
Louis A. DeNaples
Keith W. Eckel
Thomas J. Melone, CPA
John P. Moses, Esquire
FNCB Bank | Bank Officers
EXECUTIVE
RETAIL LENDING
Gerard A. Champi
President and
Chief Executive Officer
James M. Bone, Jr., CPA
Executive Vice President
Chief Financial Officer
Brian C. Mahlstedt
Executive Vice President
Chief Lending Officer
Mary G. Cummings
Senior Vice President
General Counsel
COMMERCIAL BANKING
Patrick J. Barrett
Senior Vice President
Commercial Officer III
Francis J. Heston
Senior Vice President
Commercial Officer IV
Nancy A. Jeffers
Vice President
Commercial Officer III
Michael Barrouk
Assistant Vice President
Commercial Officer III
Karen M. Smith
Assistant Vice President
Commercial Officer II
Stephanie Abraham
Banking Officer
Commercial Officer I
Justin M. Shaffern
Banking Officer
Commercial Officer I
Joan M. Triolo
Banking Officer
Government Banking Officer
Lisa L. Kinney
Senior Vice President
Retail Lending Officer
Angelo Ambrosecchia
Assistant Vice President
Retail Lending Sales Manager
Richard D. Padula
Assistant Vice President
Mortgage Loan Originator
Ashley M. Tomko
Assistant Vice President
Retail Lending Processing Supervisor
Kelly Gulvas
Banking Officer
Retail Lending Underwriting Supervisor
RETAIL BANKING
Richard D. Drust
Senior Vice President
Retail Banking Officer
David A. Kapsick
Vice President
Retail Market Manager
Deborah J. Kennedy
Vice President
Retail Market Manager
Madolyn A. MacArthur
Vice President
Community Office Manager III
Karen M. Weller
Vice President
Retail Banking Operations Manager
Michael S. Cummings
Assistant Vice President
Marketing Manager
2016 ANNUAL REPORT | 14
FNCB BANCORP, INC. and SUBSIDIARIES
FNCB Bank | Bank Officers (continued)
RETAIL BANKING (cont’d)
RETAIL BANKING (cont’d)
ADMINISTRATIVE (cont’d)
Nadine A. Limongelli
Assistant Vice President
Community Office Manager II
Sara L. Matusinski
Assistant Vice President
Branch Operations Specialist
Frank N. Mazzitelli
Assistant Vice President
Community Office Manager II
Ellen M. Pritchard
Banking Officer
Community Office Manager III
Jenny J. Severs
Assistant Vice President
Retail Training Coordinator
Bernice A. Shipp
Assistant Vice President
Community Office Manager III
Lucy E. Singer
Assistant Vice President
Community Office Manager III
Debra A. Skurkis
Assistant Vice President
Community Office Manager III
Victoria J. Bitman
Banking Officer
Community Office Manager II
Igor Z. Bodnar
Banking Officer
Community Office Manager II
Virginia Johnson
Banking Officer
Community Office Manager II
Mary C. King
Banking Officer
Community Officer Manager II
Christopher R. Natale
Banking Officer
Community Officer Manager II
Kimberly A. Rodriguez
Banking Officer
Community Officer Manager II
ADMINISTRATIVE
Jason Bohenek
Assistant Vice President
Audit Manager
Amy M. Kelley
Assistant Vice President
Assistant Controller
Cathy J. Conrad
Senior Vice President
Credit Administration Officer
Frank J. Kost
Assistant Vice President
Deposit & Electronic Banking Manager
Paul S. Dunda
Senior Vice President
Application Services Manager
Larae L. Kowalchik
Assistant Vice President
Credit Administration Supervisor
Mary Ann Gardner, CRCM
Senior Vice President
Compliance Officer
Darlene A. Pusateri
Assistant Vice President
Compliance Manager
Ronald S. Honick, CPA, CIA
Senior Vice President
Operations & Technology Services Officer
Eileen A. Sennett
Assistant Vice President
Loan Operations Manager
Richard F. Post, Jr.
Senior Vice President
Asset Recovery Manager
Walter M. Jurgiewicz
Banking Officer
System & Desktop Services Manager
Stephanie A. Westington, CPA
Senior Vice President
Controller
Christine E. Klime
Banking Officer
Credit Analyst III
Ryan J. Barhight
Vice President
Credit Analyst Supervisor
Dawn D. Gronski
Vice President
Human Resources Officer
Thomas C. Lunney
Vice President
Property Manager
William A. McGuigan, CPA
Vice President
Audit Officer
Todd Peet
Vice President
Technology Services Officer
Christopher J. Kunz
Banking Officer
Telecommunications Manager
Brooke L. Lipperini
Banking Officer
Human Resources Generalist
Jeffrey B. Mokychic
Banking Officer
Treasury Manager
Keehna Murphy
Banking Officer
Credit Analyst III
FNCB BANCORP, INC. and SUBSIDIARIES
2016 ANNUAL REPORT | 15
Member FDIC
wayne
Honesdale Rt. 6
Honesdale
Banking & Locations
MOBILE
Download the free FNCB
Mobile App today in the
iTunes App or GooglePlay Stores.
LIKE US ON FACEBOOK!
COMMUNITY OFFICE
Dunmore-Main
102 East Drinker Street
Dunmore, PA
570.346.7667
Back Mountain
1919 Memorial Hwy
Shavertown, PA
570.674.3622
Clarks Green
269 East Grove Street
Clarks Green, PA
570.586.3622
Daleville
Route 502 & 435
Daleville, PA
570.848.3622
Dickson City
934 Main Street
Dickson City, PA
570.489.8617
Dunmore-Wheeler
1219 Wheeler Avenue
Dunmore, PA
570.207.7300
Exeter
1625 Wyoming Avenue
Exeter, PA
570.603.1000
lackawanna
Clarks
Green Dickson
City
Dunmore MAIN
Scranton
Wheeler
Ave.
Keyser Village
Rt. 315
Back
Mountain
Pittston
Exeter
Plains
Daleville
Kingston Wilkes-Barre
Nanticoke
Hanover
Township
luzerne
Hazleton
ONLINE
Safe, Secure, Online Banking
www.fncb.com
Hanover Township
734 San Souci Parkway
Hanover Township, PA
570.270.3622
Hazleton
340 West Broad Street
Hazleton, PA
570.501.3622
Honesdale
1001 Main Street
Honesdale, PA
570.253.1096
Honesdale Route 6
1127 Texas Palmyra Hwy.
Honesdale, PA
570.251.8840
Keyser Village
1743 North Keyser Avenue
Scranton, PA
570.348.4880
Kingston
754 Wyoming Avenue
Kingston, PA
570.283.3622
Nanticoke
194 South Market Street
Nanticoke, PA
570.258.3622
Pittston
1700 North Twp. Blvd.
Pittston, PA
570.655.3622
Plains
27 North River Street
Plains, PA
570.825.3622
Route 315
3 Old Boston Road
Pittston, PA
570.602.3622
Scranton
419-421 Spruce Street
Scranton, PA
570.343.6572
Wilkes-Barre
1 North Main Street
Wilkes-Barre, PA
570.831.1000
LPO Commercial Office
3500 Winchester Road, Suite 101
Allentown, PA
610.304.8816
FNCB Wealth Management Services
102 East Drinker Street
Dunmore, PA
570.348.4321
FNCB Lending Center
106 East Drinker Street
Dunmore, PA
1.877.TRY. FNCB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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. 000-53869
FNCB BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
(State or Other Jurisdiction of Incorporation or Organization)
23-2900790
(I.R.S. Employer Identification No.)
102 E. Drinker St., Dunmore, PA
(Address of Principal Executive Offices)
18512
(Zip Code)
Registrant’s telephone number, including area code (570) 346-7667
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.25 par value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)
Large Accelerated Filer ☐
Non-Accelerated Filer ☐
(Do not check if a smaller reporting company)
Accelerated Filer ☒
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock of the registrant, held by non-affiliates was $80,096,019 at
June 30, 2016.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 16,661,978
shares of common stock as of March 10, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, 13 and 14 is incorporated by reference into Part III hereof from portions of the Proxy
Statement for the registrant’s 2017 Annual Meeting of Shareholders.
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Contents
1
1
9
17
17
17
18
19
PART I ..............................................................................................................................................................................
Item 1.
Business ........................................................................................................................................................
Item 1A. Risk Factors ..................................................................................................................................................
Item 1B. Unresolved Staff Comments .........................................................................................................................
Properties ......................................................................................................................................................
Item 2.
Legal Proceedings .........................................................................................................................................
Item 3.
Item 4.
Mine Safety Disclosures ...............................................................................................................................
PART II .............................................................................................................................................................................
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
19
Securities .......................................................................................................................................................
21
Selected Financial Data ................................................................................................................................
Item 6.
22
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................
53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................................................................
55
Financial Statements and Supplementary Data .............................................................................................
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 107
Item 9A. Controls and Procedures ............................................................................................................................... 107
Item 9B. Other Information ......................................................................................................................................... 109
PART III ........................................................................................................................................................................... 109
Directors, Executive Officers and Corporate Governance ............................................................................ 109
Item 10.
Executive Compensation ............................................................................................................................... 109
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...... 109
Item 12.
Item 13.
Certain Relationships and Related Transactions, and Director Independence .............................................. 109
Principal Accounting Fees and Services ....................................................................................................... 109
Item 14.
PART IV ........................................................................................................................................................................... 110
Exhibits and Financial Statement Schedules ................................................................................................ 110
Item 15.
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PART I
Item 1. Business
Overview
The Company
FNCB Bancorp, Inc., formerly First National Community Bancorp, Inc., incorporated in 1997, is a Pennsylvania business
corporation and a registered bank holding company headquartered in Dunmore, Pennsylvania. FNCB Bancorp, Inc. became
an active bank holding company on July 1, 1998 when it acquired 100% ownership of the former First National Community
Bank. In this report, the terms “FNCB,” “we,” “us,” and “our” refer to FNCB Bancorp, Inc. and its subsidiaries, unless the
context requires otherwise. In certain circumstances, however, FNCB Bancorp, Inc. uses the term “FNCB” to refer to itself.
Effective June 30, 2016, following receipt of required regulatory approvals from the Pennsylvania Department of Banking
and Securities, First National Community Bank completed a charter conversion from a national bank to a Pennsylvania state
bank. Following the change in charter, First National Community Bank changed its legal name to FNCB Bank (the “Bank”).
Subsequently, on October 4, 2016, the holding company filed an amendment to its articles of incorporation to change its
name, effective October 17, 2016, from First National Community Bancorp, Inc. to FNCB Bancorp, Inc.
FNCB’s primary activity consists of owning and operating the Bank, which provides substantially all of FNCB’s earnings as
a result of its banking services.
FNCB had net income of $6.3 million, $35.8 million and $13.4 million in 2016, 2015 and 2014, respectively. Total assets
were $1.2 billion at December 31, 2016, $1.1 billion at December 31, 2015 and $1.0 billion at December 31, 2014.
The Bank
Established as a national banking association in 1910, as of December 31, 2016 the Bank operated 19 full-service branch
offices within three contiguous counties, Lackawanna, Luzerne and Wayne, its primary market area located in the Northeast
section of Pennsylvania.
On January 6, 2017, the Bank notified the Pennsylvania Department of Banking and Securities and FNCB’s federal banking
regulators of its intent to open a limited purpose office (“LPO”) in Allentown, Lehigh County, Pennsylvania. The
Pennsylvania Department of Banking and Securities issued a non-objection letter to the Bank on February 22, 2017 regarding
the establishment of the Allentown-based LPO.
Products and Services
Retail Banking
The Bank provides a wide variety of traditional banking products and services to individuals and businesses, including online,
mobile and telephone banking, debit cards, check imaging and electronic statements. Deposit products include various
checking, savings and certificate of deposit products, as well as a line of preferred products for higher-balance customers. The
Bank is a member of the Promontory Interfinancial Network and participates in their Certificate of Deposit Account Registry
(“CDARs”) and Insured Cash Sweep (“ICS”) programs, which allow customers to secure Federal Deposit Insurance
Corporation (“FDIC”) insurance on balances in excess of the standard limitations.
The Bank also offers customers the convenience of 24-hour banking, seven days a week, through FNCB Online Banking
(“FNCB Online”) and FNCB Business Online Banking via a secure website, https://www.fncb.com. FNCB’s online product
suite includes Bill Payment, Internal and External Funds Transfer and POP Money (person to person transfers), and Purchase
Rewards. Through FNCB Online, customers can directly access their accounts, open new accounts and apply for a mortgage
or obtain a pre-qualification approval through the Bank’s mortgage center. Customers can also access FNCB Online through
the Bank’s mobile application. Telephone banking (“Account Link”), a service that provides customers with the ability to
access account information and perform related account transfers through the use of a touch tone telephone, is also available.
In addition, customers can access money from their deposit accounts by using their debit card to make purchases or withdraw
cash from any automated teller machines (“ATMs”) including ATMs located in each of the Bank’s branch offices as well as
additional locations. FNCB’s mobile deposit, available to personal banking customers with access to FNCB Online and an
eligible deposit account, allows customers to deposit checks, electronically from start to finish, from anywhere at any time.
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FNCB Business Online Banking is a menu driven product that provides the Bank’s business customers direct access to their
account information and the ability to perform internal and external transfers, wire transfers and payments through ACH
transactions, and process Direct Deposit payroll transactions for employees, 24 hours a day, 7 days a week, from their place
of business. Remote Deposit Capture allows business customers the ability to process daily check deposits to their accounts
through an online image capture environment. Business customers can access money from their deposit account by using
their “business” debit card, providing a faster, more convenient way to make purchases, track business expenses and manage
finances.
The Bank offers several overdraft protection products including, Bounce Protection, Instant Money and transfer from another
FNCB checking or savings account, which provide customers with an added level of protection against unanticipated
overdrafts due to cash flow emergencies and account reconciliation errors. The Bank offers its customers an identity theft
protection plan through a strategic partnership with an independent vendor. Subscribers select which coverage package they
desire by visiting the Bank’s secure website and choosing “Identity Protection” from the Resources menu.
Lending Activities
FNCB offers a variety of loans, including residential real estate loans, construction, land acquisition and development loans,
commercial real estate loans, commercial and industrial loans, loans to state and political subdivisions, and consumer loans,
generally to individuals and businesses in its primary market area. These lending activities are described in further detail
below.
Residential Mortgage Loans
FNCB offers a variety of fixed-rate one- to four-family residential loans including First Time Homebuyer mortgages, FHA
and Home Possible® mortgages to meet the home financing needs of customers with low down payments. FNCB also offers
a “WOW” mortgage, a first-lien, fixed-rate mortgage product with maturity terms ranging from 7.5 to 14.5 years. At
December 31, 2016, one- to four-family residential mortgage loans totaled $144.3 million, or 19.7%, of the total loan
portfolio. Except for the WOW mortgage, one- to four-family mortgage loans are originated generally for sale in the
secondary market. However, FNCB may hold in portfolio one- to four-family residential mortgage loans as deemed necessary
according to current asset/liability management strategies. During the year ended December 31, 2016, the Bank sold $9.5
million of one- to four-family mortgages. FNCB retains servicing rights on these mortgages.
Construction, Land Acquisition and Development Loans
FNCB offers interim construction financing secured by residential property for the purpose of constructing one- to four-
family homes. FNCB also offers interim construction financing for the purpose of constructing residential developments and
various commercial properties including shopping centers, office complexes and single purpose owner-occupied structures
and for land acquisition. At December 31, 2016, construction, land acquisition and development loans amounted to $18.4
million and represented 2.5% of the total loan portfolio.
Commercial Real Estate Loans
Commercial real estate mortgage loans represent the largest portion of FNCB’s total loan portfolio and loans in this portfolio
generally have larger loan balances. These loans are secured by a broad range of real estate, including but not limited to,
office complexes, shopping centers, hotels, warehouses, gas stations, convenience markets, residential care facilities, nursing
care facilities, restaurants, multifamily housing, farms and land subdivisions. At December 31, 2016, FNCB’s commercial
real estate loans totaled $243.8 million, or 33.3%, of the total loan portfolio.
Commercial and Industrial Loans
FNCB generally offers commercial loans to sole proprietors and businesses located in its primary market area. The
commercial loan portfolio includes, but is not limited to, lines of credit, dealer floor plan lines, equipment loans, vehicle loans
and term loans. These loans are primarily secured by vehicles, machinery and equipment, inventory, accounts receivable,
marketable securities and deposit accounts. At December 31, 2016, FNCB’s commercial and industrial loans totaled $153.8
million, or 21.0%, of the total loan portfolio.
Consumer Loans
Consumer loans include both secured and unsecured installment loans, lines of credit and overdraft protection loans. The
Bank is also in the business of underwriting indirect auto loans which are originated through various auto dealers in its market
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area and dealer floor plan loans. FNCB also offers home equity loans and lines of credit with a maximum combined loan-to-
value ratio of 90%, based on the appraised value of the property. Home equity loans have fixed rates of interest and are for
terms up to 15 years. Home equity lines of credit have adjustable interest rates and are based on the prime interest rate. At
December 31, 2016, FNCB’s consumer loans totaled $127.8 million, or 17.5%, of the total loan portfolio.
State and Political Subdivision Loans
FNCB originates state and political subdivision loans, including general obligation and tax anticipation notes, primarily to
municipalities in the Bank’s market area. At December 31, 2016, FNCB’s state and political subdivision loans totaled $43.7
million, or 6.0%, of the total loan portfolio.
For more information regarding FNCB’s loan portfolio and lending policies, please refer to Note 2, “Summary of Significant
Accounting Policies” to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Wealth Management
FNCB offers customers wealth management services through a third party provider. Customers are able to access alternative
deposit products such as mutual funds, annuities, stocks, and bonds directly for purchase from an outside provider.
Deposit Activities
In general, deposits, borrowings and loan repayments are the major sources of funding for lending and other investment
purposes. FNCB relies primarily on marketing, product innovation, technology and service to attract, grow and retain its
deposits. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. In determining the terms of deposit accounts, management considers the
interest rates offered by its competitors, the interest rates available on borrowings, its liquidity needs and customer
preferences. Management regularly reviews FNCB’s deposit mix and deposit pricing as part of its asset/liability management,
taking into consideration rates offered by competitors in its market area.
Competition
FNCB faces substantial competition in originating loans and in attracting deposits from a significant number of financial
institutions operating in its market area, many with a statewide or regional presence, and in some cases, a national presence,
as well as other financial institutions outside of its market area through online loan and deposit product offerings. The
competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and, with
respect to deposits, institutions offering investment alternatives, including money market funds and online deposit accounts.
The increased competition has resulted from changes in the legal and regulatory guidelines, as well as from economic
conditions. The cost of regulatory compliance remains high for community banks as compared to their larger competitors
that are able to achieve economies of scale.
As a result of consolidation in the banking industry, some of the Bank’s competitors and their respective affiliates are larger
and may enjoy advantages such as greater financial resources, a wider geographic presence, a wider array of services, or
more favorable pricing alternatives and lower origination and operating costs. FNCB considers its major competition to be
local commercial banks as well as other commercial banks with branches in its market area. Competitors may offer deposits
at higher rates and loans with lower fixed rates, more attractive terms and less stringent credit structures than FNCB has been
able to offer. The growth and profitability of FNCB depends on its continued ability to successfully compete.
Supervision and Regulation
FNCB participates in a highly regulated industry and is subject to a variety of statutes, regulations and policies, as well as
ongoing regulatory supervision and review. These laws, regulations and policies are subject to frequent change and FNCB
takes measures to comply with applicable requirements.
FNCB
FNCB is a bank holding company registered with, and subject to regulation by, the Reserve Bank and the Board of Governors
of the Federal Reserve System (“FRB”). The Bank Holding Company Act of 1956, as amended (the “BHCA”), and other
federal laws subject bank holding companies to restrictions on the types of activities in which they may engage, and to a
range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and
regulations and unsafe and unsound banking practices.
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The BHCA requires approval of the FRB for, among other things, the acquisition by a proposed bank holding company of
control of more than five percent (5%) of the voting shares, or substantially all the assets, of any bank or the merger or
consolidation by a bank holding company with another bank holding company. The BHCA also generally permits the
acquisition by a bank holding company of control or substantially all the assets of any bank located in a state other than the
home state of the bank holding company, except where the bank has not been in existence for the minimum period of time
required by state law; but if the bank is at least 5 years old, the FRB may approve the acquisition.
With certain limited exceptions, a bank holding company is prohibited from acquiring control of any voting shares of any
company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or furnishing services to or performing services for its authorized subsidiaries. A
bank holding company may, however, engage in, or acquire an interest in a company that engages in, activities that the FRB
has determined by order or regulation to be so closely related to banking or managing or controlling banks as to be properly
incident thereto. In making such a determination, the FRB is required to consider whether the performance of such activities
can reasonably be expected to produce benefits to the public, such as convenience, increased competition or gains in
efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The FRB is also empowered to differentiate between activities
commenced de novo and activities commenced by the acquisition, in whole or in part, of a going concern. Some of the
activities that the FRB has determined by regulation to be closely related to banking include making or servicing loans,
performing certain data processing services, acting as a fiduciary or investment or financial advisor, and making investments
in corporations or projects designed primarily to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or any of its subsidiaries, or investments in the stock or other securities
thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Further, a holding company and
any subsidiary bank are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit. A
subsidiary bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any
of the foregoing on the condition that: (i) the customer obtain or provide some additional credit, property or services from or
to such bank other than a loan, discount, deposit or trust service; (ii) the customer obtain or provide some additional credit,
property or service from or to the bank holding company or any other subsidiary of the bank holding company; or (iii) the
customer not obtain some other credit, property or service from competitors, except for reasonable requirements to assure the
soundness of credit extended.
The Gramm Leach-Bliley Act of 1999 (the “GLB Act”) allows a bank holding company or other company to certify status
as a financial holding company, which allows such company to engage in activities that are financial in nature, that are
incidental to such activities, or are complementary to such activities without further approval. FNCB is not a financial holding
company. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or
acting as an insurance principal, agent or broker, underwriting, dealing in or making markets in securities, and engaging in
merchant banking under certain restrictions. It also authorizes the FRB to determine by regulation what other activities are
financial in nature, or incidental or complementary thereto.
FNCB also is subject to the jurisdiction of the Securities and Exchange Commission (“SEC”) and is subject to the disclosure
and regulatory requirements under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended. The common stock of FNCB trades on the OTCQX marketplace under the symbol “FNCB” and, therefore, FNCB
also is subject to the rules and requirements of FINRA for companies with securities trading on the OTCQX.
The Bank
Effective June 30, 2016, upon its conversion to a state charter, the Bank is regulated by the Pennsylvania Department of
Banking and Securities. The Bank’s deposit accounts are insured up to the maximum legal limit by the Deposit Insurance
Fund of the FDIC and accordingly, the Bank is also regulated by the FDIC. The regulations of these agencies and the FDIC
govern most aspects of the Bank’s business, including required reserves against deposits, loans, investments, mergers and
acquisitions, borrowings, dividends and location and number of branch offices. The laws and regulations governing the Bank
generally have been promulgated to protect depositors and the Deposit Insurance Fund, and not for the purpose of protecting
shareholders.
Branching and Interstate Banking. The federal banking agencies are authorized to approve interstate bank merger transactions
without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks
has opted out of the interstate bank merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the “Riegle-Neal Act”) by adopting a law after the date of enactment of the Riegle-Neal Act and before June 1, 1997
that applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks.
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Interstate bank mergers are also subject to the nationwide and statewide insured deposit concentration limitations described
in the Riegle-Neal Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) permits national and
state banks to establish de novo branches in other states to the same extent as a bank chartered by that state would be so
permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state
banks to establish branches in that state. Pennsylvania law had previously permitted banks chartered in Pennsylvania to
establish branches in other states without limitation, thereby permitting national banks in Pennsylvania to establish branches
anywhere in the state, but only permitted out of state banks to branch in Pennsylvania if the home state of the out-of-state
bank permits Pennsylvania banks to establish de novo branches. The branching provisions of the Dodd-Frank Act could result
in more banks from other states establishing de novo branches in the Bank’s market area.
USA Patriot Act and the Bank Secrecy Act (“BSA”). Under the BSA, a financial institution is required to have systems in
place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required
to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are
required to file suspicious activity reports for transactions that involve more than $5,000 and that the financial institution
knows, suspects or has reason to suspect, involves illegal funds, is designed to evade the requirements of the BSA or has no
lawful purpose. Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act, commonly referred to as the “USA Patriot Act” or the “Patriot Act,” financial institutions are subject
to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards
intended to detect, and prevent, the use of the United States financial system for money laundering and terrorist financing
activities. The Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs,
including employee training and independent audit requirements, meet minimum specified standards, follow minimum
standards for customer identification and maintenance of customer identification records, and regularly compare customer
lists against lists of suspected terrorists, terrorist organizations and money launderers.
Capital Adequacy Requirements. Federal banking agencies have adopted risk based capital adequacy and leverage capital
adequacy requirements pursuant to which they assess the adequacy of capital in examining and supervising banks and bank
holding companies and in analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy
of capital based on the risk inherent in various classes of assets and off-balance sheet items.
The federal banking regulators issued a final rulemaking in July 2013 (the “Basel III Rule”) to implement the Basel III
regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking
organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began
compliance on January 1, 2014. The final rules call for the following capital requirements:
● A minimum ratio of common equity tier I (“CET I”) capital to risk-weighted assets of 4.5%.
● A minimum ratio of tier I capital to risk-weighted assets of 6%.
● A minimum ratio of total capital to risk-weighted assets of 8%.
● A minimum leverage ratio of 4%.
Basel III also establishes a “countercyclical capital buffer,” that is designed to absorb losses during periods of economic
stress. Generally, the capital conservation buffer of 2.50% of risk-weighted assets, when fully phased in, will be imposed
when federal banking regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic
risk. For all banking institutions, the phase-in period for the capital conservation buffer requirement began on January 1,
2016 at 0.625% and will increase by that amount each year until it reaches 2.50% on January 1, 2019.
Banking institutions with a ratio of CET I to risk-weighted assets above the minimum but below the conservation buffer (or
below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face
constraints on their ability to pay dividends, to effect equity repurchases and pay discretionary bonuses to executive officers,
which constraints vary based on the amount of the shortfall.
The Basel III Rule also includes, as part of the definition of CET I capital, a requirement that banking institutions include the
amount of Accumulated Other Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses,
net of tax, on available-for-sale securities, that are not other than temporarily impaired (“OTTI”) in calculating regulatory
capital, unless the institution makes a one-time opt-out election from this provision in connection with the filing of its first
regulatory reports after applicability of the Basel III Rule to that institution. The Basel III Rule also imposes a 4.00%
minimum Tier I leverage ratio.
5
The Basel III final framework provides for a number of new deductions from and adjustments to CET I. These include, for
example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and
significant investments in non-consolidated financial entities be deducted from CET I to the extent that any one such category
exceeds 10.00% of CET I or all such categories in the aggregate exceed 15.00% of CET I.
The Basel III Rule also makes changes to the manner of calculating risk-weighted assets. It imposes methodologies for
determining risk weighted assets, including revisions to recognition of credit risk mitigation, such as a greater recognition of
financial collateral and a wider range of eligible guarantors. They also include risk weighting of equity exposures and past
due loans; and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit
risk profiles, including higher loan to value and equity components.
As discussed below, the Basel III Rule also integrates the new capital requirements into the prompt corrective action
provisions under Section 38 of the Federal Deposit Insurance Act (“FDIA”).
In general, the Basel III Rule became applicable to FNCB and the Bank on January 1, 2015. FNCB and the Bank elected to
exclude AOCI in calculating regulatory capital with the filing of their respective first regulatory reports after applicability of
the Basel III Rule to them. Additionally, FNCB’s outstanding subordinated notes are subject to phase out and will cease to
qualify as capital for regulatory purposes. Overall, FNCB believes that implementation of the Basel III Rule did not have a
material adverse effect on its or the Bank’s capital ratios, earnings, shareholder’s equity, or its ability to pay discretionary
bonuses to executive officers.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required to implement a system of
prompt corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement the system of prompt corrective action established by Section 38 of the FDIA.
The following are the capital requirements under the Basel III Rules integrated into the prompt corrective action category
definitions. As of December 31, 2016, the following capital requirements were applicable to the Bank for purposes of Section
38 of the FDIA.
Total
Tier I
Capital Category
Well capitalized ....................
Adequately capitalized with
Risk-Based
Risk-Based
Capital Ratio Capital Ratio Capital Ratio
>/ = 8.0%
>/ = 6.625%
>/ = 10.0%
>/ = 8.625%
>/ = 6.5%
>/ = 5.125%
CET I
converation buffer ..............
Adequately capitalized .........
Undercapitalized ..................
Significantly
undercapitalized .................
Critically undercapitalized ...
>/ = 8.0%
< 8.0%
< 6.0%
>/ = 6.0%
< 6.0%
< 4.0%
>/ = 4.5%
< 4.5%
< 3.0%
Leverage
Ratio
>/ = 5.0%
>/ = 4.0%
>/ = 4.0%
< 4.0%
< 3.0%
Tangible
Equity
to Assets
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Less than 2.0%
At December 31, 2016, FNCB met its capital requirements with a common equity Tier I capital to risk-weighted assets of
9.97%, a Tier I capital to risk-weighted assets ratio of 10.23%, a Total capital to risk-weighted assets ratio of 12.06%, and a
Leverage ratio of 7.53%.
Regulatory Enforcement Authority. Federal banking law grants substantial enforcement powers to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general,
these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with
regulatory authorities.
The Bank and its “institution-affiliated parties,” including its management, employees, agents, independent contractors,
consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs,
are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a governmental
agency. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and
institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance and cease-and-desist
orders. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or
practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also
6
be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined
by the ordering agency to be appropriate.
Under provisions of the federal securities laws, a determination by a court or regulatory agency that certain violations have
occurred at a company or its affiliates can result in fines, restitution, a limitation of permitted activities, disqualification to
continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions
and violations can also affect a public company in its timing and ability to expeditiously issue new securities into the capital
markets.
The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect to the classification of assets and the
establishment of adequate loan loss allowances for regulatory purposes.
As a result of the previous volatility and instability in the financial system, Congress, the bank regulatory authorities and
other government agencies have called for or proposed additional regulation and restrictions on the activities, practices and
operations of banks and their holding companies. While many of these proposals relate to institutions that have accepted
investments from, or sold troubled assets to, the United States Department of the Treasury (“Treasury Department”) or other
government agencies, or otherwise participate in government programs intended to promote financial stabilization, Congress
and the federal banking agencies have broad authority to require all banks and holding companies to adhere to more rigorous
or costly operating procedures, corporate governance procedures, or to engage in activities or practices which they might not
otherwise elect. Any such requirement could adversely affect FNCB’s business and results of operations. FNCB did not
accept an investment by the Treasury Department in its preferred stock or warrants to purchase common stock, and except
for the increase in deposit insurance for customer accounts, has not participated in any of the programs adopted by the
Treasury Department, FDIC or FRB.
The Dodd-Frank Act. The Dodd-Frank Act made significant changes to the bank regulatory structure and affects the lending,
deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank
Act has required a number of federal agencies to adopt a broad range of new rules and regulations, and to prepare various
studies and reports for Congress. The federal agencies have been given significant discretion in drafting these rules and
regulations. To date, the following provisions of the Dodd-Frank Act are considered to be of greatest significance to FNCB:
●
●
●
expands the authority of the FRB to examine bank holding companies and their subsidiaries, including insured
depository institutions;
requires a bank holding company to be well capitalized and well managed to receive approval of an interstate bank
acquisition;
changes standards for federal preemption of state laws related to national banks and their subsidiaries;
● provides mortgage reform provisions regarding a customer’s ability to pay and making more loans subject to
●
●
●
provisions for higher-cost loans and new disclosures;
creates the Consumer Financial Protection Bureau (the “CFPB”) that has rulemaking authority for a wide range of
consumer protection laws that apply to all banks and has broad powers to supervise and enforce consumer protection
laws;
creates the Financial Stability Oversight Council with authority to identify institutions and practices that might pose
a systemic risk;
introduces additional corporate governance and executive compensation requirements on companies subject to the
Securities and Exchange Act of 1934, as amended;
● permits FDIC-insured banks to pay interest on business demand deposits;
●
requires that holding companies and other companies that directly or indirectly control an insured depository
institution serve as a source of financial strength;
● makes permanent the $250 thousand limit for federal deposit insurance at all insured depository institutions; and
● permits national and state banks to establish interstate branches to the same extent as the branch host state allows
establishment of in-state branches.
President Donald J. Trump has indicated that one of the goals of his administration is to reduce federal government regulation,
including, among other things, reconsidering certain regulations promulgated under the Dodd-Frank Act. On February 3,
2017, President Trump issued an executive order that directs the Secretary of the Treasury Department to consult with the
heads of the member agencies of the Financial Stability Oversight Council and report to President Trump on the extent to
which the laws and regulations governing the U.S. financial system are in accord with certain enumerated “core principles”
(the “Executive Order”). The “core principles” set forth in the Executive Order relate to U.S. financial system regulation, and
include fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis, and
making “regulation more efficient, effective and appropriately tailored.” Given the recent nature of this Trump
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Administration initiative, at this time, FNCB cannot determine what existing provisions of and regulations under the Dodd-
Frank Act, if any, will be repealed or modified, or what impact, if any, the effect of the Trump Administration’s initiative
may have on FNCB, its business or future results of operations.
Consumer Financial Protection Bureau. The Dodd-Frank Act created the CFPB, a new independent federal agency within
the Federal Reserve System, having broad rulemaking, supervisory and enforcement powers under various federal consumer
financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement
Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the consumer financial privacy provisions of
the GLB Act and certain other statutes. The CFPB, which began operations on July 21, 2011, has examination and primary
enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions, including
the Bank, are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking
regulators for compliance with federal consumer protection laws and regulations. The CFPB also has authority to prevent
unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act
permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level
and, in certain circumstances, permits state attorney generals to enforce compliance with both the state and federal laws and
regulations.
A focus of the CFPB’s rulemaking efforts has been on reforms related to residential mortgage transactions. In 2013, the
CFPB issued final rules related to a borrower’s ability to repay and qualified mortgage standards, mortgage servicing
standards, loan originator compensation standards, requirements for high-cost mortgages, appraisal and escrow standards and
requirements for higher-priced mortgages. Several of the CFPB’s rulemakings became effective in January 2014. In
November 2013, the CFPB issued final rules establishing integrated disclosure requirements for lenders and settlement agents
in connection with most closed end, real estate secured consumer loans. These rules became effective in August 2015. During
2015, the CFPB issued additional rulemaking expanding the scope of information lenders must report in connection with
mortgage and other housing-related loan applications under the Home Mortgage Disclosure Act.
The final rule implementing the Dodd-Frank Act requirement that lenders determine whether a consumer has the ability to
repay a mortgage loan, which went into effect on January 10, 2014, establishes certain minimum requirements for creditors
when making ability to pay determinations, and establishes certain protections from liability for mortgages meeting the
definition of “qualified mortgages.” The rule affords greater legal protections for lenders making qualified mortgages that
are not “higher priced.” Qualified mortgages must generally satisfy detailed requirements related to product features,
underwriting standards, and a points and fees requirement whereby the total points and fees on a mortgage loan cannot exceed
specified amounts or percentages of the total loan amount. Mandatory features of a qualified mortgage include: (1) a loan
term not exceeding 30 years and (2) regular periodic payments that do not result in negative amortization, deferral of principal
repayment, or a balloon payment. The rule creates special categories of qualified mortgages originated by certain smaller
creditors. The Bank’s current business strategy, product offerings, and profitability may change as the rule is interpreted by
the regulators and courts.
The final rules adopting new mortgage servicing standards, which took effect on January 10, 2014, impose new requirements
regarding force-placed insurance, mandate certain notices prior to rate adjustments on adjustable-rate mortgages, and
establish requirements for periodic disclosures to borrowers. These requirements will affect notices to be given to consumers
as to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for avoiding
“force-placed” insurance. Servicers will be prohibited from processing foreclosures when a loan modification is pending, and
must wait until a loan is more than 120 days delinquent before initiating a foreclosure action. Servicers must provide direct
and ongoing access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain
accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred.
The CFPB’s rulemaking, examination and enforcement authority has and will continue to significantly affect financial
institutions offering consumer financial products and services, including FNCB and the Bank. These regulatory activities
may limit the types of financial services and products the Bank may offer, which in turn may reduce FNCB’s revenues.
FDIC Insurance Premiums. The FDIC maintains a risk-based assessment system for determining deposit insurance
premiums. Four risk categories (I-IV), each subject to different premium rates, are established based upon an institution’s
status as well capitalized, adequately capitalized or undercapitalized, and the institution’s supervisory rating.
The Dodd-Frank Act permanently increased the maximum deposit insurance amount for banks, savings institutions and credit
unions to $250,000 per depositor. The Dodd-Frank Act also broadened the base for FDIC insurance assessments. Assessments
are now based on a financial institution’s average consolidated total assets less tangible equity capital. The Dodd-Frank Act
requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by
2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio
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exceeds certain thresholds. The Dodd-Frank Act eliminated the statutory prohibition against the payment of interest on
business checking accounts.
An insured institution is required to pay deposit insurance premiums on its assessment base in accordance with its risk
category. There are three adjustments that can be made to an institution’s initial base assessment rate: (1) a potential decrease
for long-term unsecured debt, including senior and subordinated debt and, for small institutions, a portion of Tier I capital;
(2) a potential increase for secured liabilities above a threshold amount; and (3) for non-Risk Category I institutions, a
potential increase for brokered deposits above a threshold amount. The FDIC may also impose special assessments from time
to time.
At December 31, 2016, the Bank was considered risk category I, the lowest risk category, for deposit insurance assessments
and paid an annual assessment rate ranging from 0.0005 basis points to 0.0006 basis points on the assessment base of average
consolidated total assets less the average tangible equity during the assessment period.
Dividend Restrictions
FNCB Bancorp, Inc. is a legal entity separate and distinct from the Bank. FNCB Bancorp, Inc.’s revenues (on a parent
company only basis) and its ability to pay dividends to its shareholders are almost entirely dependent upon the receipt of
dividends from the Bank. The right of FNCB Bancorp, Inc., and consequently the rights of its creditors and shareholders to
participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise
is necessarily subject to the prior claims of creditors of the subsidiary (including depositors) except to the extent that claims
of FNCB Bancorp, Inc., in its capacity as a creditor, may be recognized. Additionally, the ability of the Bank to pay dividends
to FNCB Bancorp, Inc. is subject to Pennsylvania state law and various regulatory restrictions.
The declaration of cash dividends on FNCB’s common stock is at the discretion of its board of directors, and any decision to
declare a dividend is based on a number of factors, including, but not limited to, earnings, prospects, financial condition,
regulatory capital levels, applicable covenants under any credit agreements, notes and other contractual restrictions,
Pennsylvania law, federal bank regulatory law, and other factors deemed relevant.
Employees
As of December 31, 2016, FNCB, including the Bank employed 253 persons, including 34 part-time employees.
Available Information
FNCB files reports, proxy and information statements and other information electronically with the Securities and Exchange
Commission (“SEC”). You may read and copy any materials that FNCB files with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, DC 20549. Information may be obtained on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website site address is
https://www.sec.gov. FNCB makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K and amendments thereto available through its website at https://www.fncb.com. These reports may also be
obtained free of charge as soon as practicable after filing or furnishing them to the SEC upon request by sending an email to
corporatesecretary@fncb.com. Information may also be obtained via written request to FNCB Bancorp, Inc. Attention: Chief
Financial Officer, 102 East Drinker Street, Dunmore, PA 18512.
Item 1A. Risk Factors.
The risk factors discussed below, which could materially affect FNCB’s business, operating results or financial condition,
should be considered in addition to the other information presented in this Annual Report on Form 10-K. However, the risk
factors described below are not meant to be all inclusive. Additional risks and uncertainties not currently known or that FNCB
currently deems to be insignificant may also materially adversely affect its business, operating results or financial condition.
Risks Related to FNCB and its Business
FNCB may not be able to successfully compete with others for business.
FNCB competes for loans, deposits and investment dollars with numerous regional and national banks and other community
banking institutions, online divisions of banks located in other markets as well as other kinds of financial institutions and
enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, private
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lenders and internet-based financial technology (“Fintech”) companies. There is also competition for banking business from
competitors outside of its market area. As noted above, FNCB and the Bank are subject to extensive regulations and
supervision, including, in many cases, regulations that limit the type and scope of activities. Many competitors have
substantially greater resources and may offer certain services that FNCB and the Bank does not provide, and operate under
less stringent regulatory environments. The differences in available resources and applicable regulations may make it harder
for FNCB to compete profitably, reduce the rates that it can earn on loans and investments, increase the rates it must offer on
deposits and other funds, and adversely affect its overall financial condition and earnings. For additional discussion of
FNCB’s competitive environment, see the section entitled “Business – Competition” included in Item 1 to this Annual Report
on Form 10-K.
Downward trends in the economic environment could pose significant challenges for FNCB and could adversely affect
its financial condition and results of operations.
FNCB is operating in a challenging economic environment, including uncertain national and local conditions. Additionally,
concerns from some of the countries in the European Union, Asia and elsewhere have also strained the financial markets both
abroad and domestically. Financial institutions continue to be affected by softness in the real estate market and constrained
financial markets. While conditions appear to have improved since the depths of the financial crisis, generally and in FNCB’s
market area, should declines in real estate values, home sales volumes, and financial stress on borrowers as a result of the
uncertain economic environment re-emerge, such events could have an adverse effect on our borrowers or their customers,
which could adversely affect our financial condition and results of operations. A worsening of these conditions would likely
exacerbate the adverse effects on us and others in the financial institutions industry. Deterioration in economic conditions in
our markets could drive loan losses beyond that which is provided for in the allowance for loan and lease losses (“ALLL”),
which would necessitate further increases in the provision for loan and lease losses, and, in turn, FNCB’s earnings and capital.
FNCB may also face the following risks in connection with the economic environment:
● economic conditions that negatively affect housing prices and the job market could result in deterioration in credit
quality of the loan portfolios, which, in turn, could have , a negative impact on our business;
● market developments may affect consumer confidence levels and result in reduced loan demand and cause adverse
changes in payment patterns, leading to a reduced asset base, as well as increases in delinquencies and default rates
on loans and other credit facilities;
● the methodologies that are used to establish the ALLL rely on complex judgments, including forecasts of economic
conditions, that are inherently uncertain and may be inadequate;
● the continuation of low market interest rates, may further pressure FNCB’s interest margins as interest-earning
assets, such as loans and investments, are reinvested or reprice at lower rates; and
● volatility in the market, and lower level of confidence in the banking system, could require the Bank to pay higher
interest rates to obtain deposits to meet the needs of its depositors and borrowers, resulting in reduced margin and
net interest income. If conditions worsen, it is possible that banks such as the Bank may be unable to meet the needs
of their depositors and borrowers, which could, in the worst case, result in the Bank being placed into receivership.
If these conditions or similar ones continue to exist or worsen, FNCB could experience adverse effects on its operating results
and/or financial condition.
FNCB is subject to lending risk.
As of December 31, 2016, approximately 35.8% of FNCB’s loan portfolio consisted of commercial real estate loans and
construction, land acquisition and development loans. These types of loans are generally viewed as having a higher risk of
default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real
estate loans and consumer loans. Because FNCB’s loan portfolio contains a significant number of commercial real estate
loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-
performing loans. All non-performing loans totaled $2.2 million, or 0.3% of total gross loans, as of December 31, 2016, and
$3.8 million, or 0.5% of total gross loans, as of December 31, 2015. Although non-performing asset levels decreased from
the prior year, an increase in non-performing loans in the future could result in an increase in the provision for loan and lease
losses and an increase in loan charge-offs, both of which could have a material adverse effect on FNCB’s financial condition
and results of operations. The lending activities in which the Bank engages carry the risk that the borrowers will be unable
to perform on their obligations. As such, general economic conditions, nationally and in FNCB’s primary market area, will
have a significant impact on its results of operations. To the extent that economic conditions deteriorate, business and
individual borrowers may be less able to meet their obligations to the Bank in full, in a timely manner, resulting in decreased
earnings or losses to the Bank. To the extent that loans are secured by real estate, adverse conditions in the real estate market
may reduce the ability of the borrowers to generate the necessary cash flow for repayment of the loan, and reduce the ability
to collect the full amount of the loan upon a default. To the extent that the Bank makes fixed-rate loans, general increases in
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interest rates will tend to reduce its spread as the interest rates FNCB must pay for deposits would increase while interest
income is flat. Economic conditions and interest rates may also adversely affect the value of property pledged as security for
loans.
FNCB’s concentrations of loans, including those to insiders and related parties, may create a greater risk of loan defaults
and losses.
A substantial portion of FNCB’s loans are secured by real estate in the Northeastern Pennsylvania market, and substantially
all of its loans are to borrowers in that area. FNCB also has a significant amount of commercial real estate, commercial and
industrial, construction, land acquisition and development loans and land-related loans for residential and commercial
developments. At December 31, 2016, $430.1 million, or 58.8%, of gross loans were secured by real estate, primarily
commercial real estate. Management has taken steps to mitigate commercial real estate concentration risk by diversification
among the types and characteristics of real estate collateral properties, sound underwriting practices, and ongoing portfolio
monitoring and market analysis. Of total gross loans, $18.4 million, or 2.5%, were construction, land acquisition and
development loans. Construction, land acquisition and development loans have the highest risk of uncollectability. An
additional $153.8 million, or 21.0%, of portfolio loans were commercial and industrial loans not secured by real estate.
Historically, commercial and industrial loans generally have had a higher risk of default than other categories of loans, such
as single family residential mortgage loans. The repayment of these loans often depends on the successful operation of a
business and are more likely to be adversely affected by adverse economic conditions. While management believes that the
loan portfolio is well diversified in terms of borrowers and industries, these concentrations expose FNCB to the risk that
adverse developments in the real estate market, or in the general economic conditions in its general market area, could
increase the levels of non-performing loans and charge-offs, and reduce loan demand. In that event, FNCB would likely
experience lower earnings or losses. Additionally, if, for any reason, economic conditions in its market area deteriorate, or
there is significant volatility or weakness in the economy or any significant sector of the area’s economy, FNCB’s ability to
develop business relationships may be diminished, the quality and collectability of its loans may be adversely affected, the
value of collateral may decline and loan demand may be reduced.
Commercial real estate, commercial and industrial and construction, land acquisition and development loans tend to have
larger balances than single family mortgage loans and other consumer loans. Because FNCB’s loan portfolio contains a
significant number of commercial and industrial loans, commercial real estate loans and construction, land acquisition and
development loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant
increase in non-performing assets. An increase in non-performing loans could result in a loss of earnings from these loans,
an increase in the provision for loan and lease losses, or an increase in loan charge-offs, which could have an adverse impact
on FNCB’s results of operations and financial condition.
Guidance adopted by federal banking regulators provides that banks having concentrations in construction, land development
or commercial real estate loans are expected to have and maintain higher levels of risk management and, potentially, higher
levels of capital, which may adversely affect shareholder returns, or require FNCB to obtain additional capital sooner than it
otherwise would. Excluded from the scope of this guidance are loans secured by non-farm nonresidential properties where
the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or
affiliate of the party, who owns the property.
Outstanding loans and line of credit balances to directors, officers and their related parties totaled $42.0 million as of
December 31, 2016. At December 31, 2016, except for one loan relationship aggregating $381 thousand to a business partially
owned by a director that was classified as “Special Mention,” there were no loans to directors, officers and their related
parties that were categorized as criticized loans within the Bank’s risk rating system, meaning they are not considered to
present a higher risk of collection than other loans. FNCB has received all contractual principal and interest payments in a
timely manner and the individual loans in the relationship were current as of December 31, 2016. Management has classified
the loan relationship as special mention strictly because FNCB has not received current financial information from a non-
related party to the loan agreements. For more information regarding loans to officers and directors and/or their related parties,
please refer to Note 11, “Related Party Transactions” to the consolidated financial statements included in Item 8 and Item 13,
“Certain Relationships and Related Transactions, and Director Independence” to this Annual Report on Form 10-K.
FNCB’s financial condition and results of operations would be adversely affected if the ALLL is not sufficient to absorb
actual losses or if increases to the ALLL were required.
The lending activities in which the Bank engages carry the risk that the borrowers will be unable to perform on their
obligations, and that the collateral securing the payment of their obligations may be insufficient to assure repayment. FNCB
may experience significant credit losses, which could have a material adverse effect on its operating results. Management
makes various assumptions and judgments about the collectability of FNCB’s loan portfolio, including the creditworthiness
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of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of its loans,
which it uses as a basis to estimate and establish its reserves for losses. In determining the amount of the ALLL, management
reviews loans, loss and delinquency experience, and evaluates current economic conditions. If these assumptions prove to be
incorrect, the ALLL may not cover inherent losses in FNCB’s loan portfolio at the date of its financial statements. Material
additions to FNCB’s allowance or extensive charge-offs would materially decrease its net income. At December 31, 2016,
the ALLL totaled $8.4 million, representing 1.15% of total loans.
Although management believes FNCB’s underwriting standards are adequate to manage normal lending risks, it is difficult
to assess the future performance of its loan portfolio due to the ongoing economic environment and the state of the real estate
market. The assessment of future performance of the loan portfolio is inherently uncertain. FNCB can give no assurance that
non-performing loans will not increase or that non-performing or delinquent loans will not adversely affect its future
performance.
In addition, federal and state regulators periodically review the ALLL and may require increases to the ALLL or further loan
charge-offs. Any increase in ALLL or loan charge-offs as required by these regulatory agencies could have a material adverse
effect on FNCB’s results of operations and financial condition.
If management concludes that the decline in value of any of FNCB’s investment securities is other-than-temporary, FNCB
is required to write down the security to reflect credit-related impairments through a charge to earnings.
Management reviews FNCB’s investment securities portfolio at each quarter-end reporting period to determine whether the
fair value is below the current carrying value. When the fair value of any of FNCB’s debt investment securities has declined
below its carrying value, management is required to assess whether the decline represents an OTTI. If management concludes
that the decline is other-than-temporary, it is required to write down the value of that security to reflect the credit-related
impairments through a charge to earnings. Changes in the expected cash flows of securities in FNCB’s portfolio and/or
prolonged price declines in future periods may result in OTTI, which would require a charge to earnings. Due to the
complexity of the calculations and assumptions used in determining whether an asset is impaired, any impairment disclosed
may not accurately reflect the actual impairment in the future. In addition, to the extent that the value of any of FNCB’s
investment securities is sensitive to fluctuations in interest rates, any increase in interest rates may result in a decline in the
value of such investment securities.
FNCB held approximately $3.3 million in capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) as of
December 31, 2016. FNCB must own such capital stock to qualify for membership in the Federal Home Loan Bank system
which enables it to borrow funds under the FHLB advance program. If the FHLB were to cease operations, FNCB’s business,
financial condition, liquidity, capital and results of operations may be materially and adversely affected.
Changes in interest rates could reduce income, cash flows and asset values.
FNCB’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference
between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-
bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond
FNCB’s control, including general economic conditions and policies of various governmental and regulatory agencies and,
in particular, the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest
FNCB receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could
also affect (i) FNCB’s ability to originate loans and obtain deposits, (ii) the fair value of FNCB’s financial assets and
liabilities, and (iii) the average duration of FNCB’s mortgage-backed securities portfolio.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and
investments, FNCB’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be
adversely affected if the interest rates received on loans and investments fall more quickly than the interest rates paid on
deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material
adverse effect on FNCB’s financial condition and results of operations.
FNCB may need to raise additional capital in the future, but that capital may not be available when it is needed and on
terms favorable to current shareholders.
Laws, regulations and banking regulators require FNCB and the Bank to maintain adequate levels of capital to support their
operations. In addition, capital levels are determined by FNCB’s management and Board of Directors based on capital levels
that they believe are necessary to support business operations. Management regularly evaluates its present and future capital
requirements and needs and analyzes capital raising alternatives and options. Although FNCB succeeded in meeting its
12
current regulatory capital requirements, it may need to raise additional capital in the future to support possible loan losses or
potential OTTI during future periods, to meet future regulatory capital requirements or for other reasons.
The Board of Directors may determine from time to time that FNCB needs to raise additional capital by issuing additional
common shares or other securities. FNCB is not restricted from issuing additional common shares, including securities that
are convertible into or exchangeable for, or that represent the right to receive, common shares. Because FNCB’s decision to
issue securities in any future offering will depend on market conditions and other factors beyond its control, FNCB cannot
predict or estimate the amount, timing or nature of any future offerings, or the prices at which such offerings may be affected.
Such offerings will likely be dilutive to common shareholders from ownership, earnings and book value perspectives. New
investors also may have rights, preferences and privileges that are senior to, and that adversely affect, its then current common
shareholders. Additionally, if FNCB raises additional capital by making additional offerings of debt or preferred equity
securities, upon liquidation, holders of its debt securities and shares of preferred shares, and lenders with respect to other
borrowings, will receive distributions of available assets prior to the holders of common shares. Additional equity offerings
may dilute the holdings of existing shareholders or reduce the market price of FNCB’s common shares, or both. Holders of
FNCB’s common shares are not entitled to preemptive rights or other protections against dilution.
FNCB cannot provide any assurance that additional capital will be available on acceptable terms or at all. Any occurrence
that may limit access to the capital markets may adversely affect FNCB’s capital costs and its ability to raise capital and, in
turn, its liquidity. Moreover, if FNCB needs to raise capital, it may have to do so when many other financial institutions are
also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional
capital on acceptable terms when needed could have a material adverse effect on FNCB’s business, financial condition and
results of operations.
Interruptions or security breaches of FNCB’s information systems could negatively affect its financial performance or
reputation.
In conducting its business, FNCB relies heavily on its information systems. FNCB collects and stores sensitive data, including
proprietary business information and personally identifiable information of its customers and employees, in its data centers
and on its networks. The secure processing, maintenance and transmission of this information is critical to FNCB’s operations
and business strategy. Maintaining and protecting those systems is difficult and expensive, as is dealing with any failure,
interruption or breach of those systems. Despite security measures, FNCB’s information technology and infrastructure may
be vulnerable to security breaches, cyber-attacks by hackers or breaches due to employee error, malfeasance or other
disruptions. Any damage, failure or breach could cause an interruption in operations. Computer break-ins, phishing and other
disruptions could also jeopardize the security of information stored in and transmitted through FNCB’s computer systems
and network infrastructure. The occurrence of any failures, interruptions or breaches could damage FNCB’s reputation,
disrupt operations and the services provided to customers, cause a loss of confidence in the products and the services provided,
cause FNCB to incur additional expenses, result in a loss of customer business and data, result in legal claims or proceedings,
result in liability under laws that protect the privacy of personal information, result in regulatory penalties, or expose FNCB
to other liability, any of which could have a material adverse effect on its business, financial condition and results of
operations and competitive position.
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, financial performance may suffer.
Effective and competitive delivery of FNCB’s products and services increasingly depends on information technology
resources and processes, both those provided internally as well as those provided through third party vendors. In addition to
better serving customers, the effective use of technology can improve efficiency and help reduce costs. FNCB’s future success
will depend, in part, upon its ability to address the needs of its customers by using technology to provide products and services
to enhance customer convenience, as well as to create efficiencies in its operations. There is increasing pressure to provide
products and services at lower prices. This can reduce net interest income and noninterest income from fee-based products
and services. In addition, the widespread adoption of new technologies could require FNCB to make substantial capital
expenditures to modify or adapt existing products and services or develop new products and services. FNCB may not be
successful in introducing new products and services in response to industry trends or developments in technology, or those
new products may not achieve market acceptance. Many of FNCB’s competitors have greater resources to invest in
technological improvements. Additionally, as technology in the financial services industry changes and evolves, keeping
pace becomes increasingly complex and expensive. There can be no assurance that FNCB will be able to effectively
implement new technology-driven products and services, which could reduce its ability to compete effectively. As a result,
FNCB could lose business, be forced to price products and services on less advantageous terms to retain or attract customers,
or be subject to cost increases.
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FNCB’s profitability depends significantly on economic conditions in the Commonwealth of Pennsylvania, specifically in
Lackawanna, Luzerne and Wayne Counties.
FNCB’s success depends primarily on the general economic conditions in the Commonwealth of Pennsylvania and the
specific local markets in which it operates. Unlike larger national or other regional banks that are more geographically
diversified, FNCB provides banking and financial services to customers primarily in the Lackawanna, Luzerne and Wayne
County markets. The local economic conditions in these areas have a significant impact on the demand for FNCB’s products
and services as well as the ability of customers to repay loans, the value of the collateral securing loans, and the stability of
deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of
terrorism, severe weather or natural disasters, outbreak of hostilities or other international or domestic occurrences,
unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have
a material adverse effect on FNCB’s financial condition and results of operations.
FNCB relies on management and other key personnel and the loss of any of them may adversely affect its operations.
FNCB believes each member of the senior management team is important to its success and the unexpected loss of any of
these persons could impair day-to-day operations as well as its strategic direction.
FNCB’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most
activities engaged in by FNCB can be intense and it may not be able to hire people or retain them. The unexpected loss of
services of one or more of FNCB’s key personnel could have a material adverse impact on its business due to the loss of their
skills, knowledge of its market, years of industry experience and to the difficulty of promptly finding qualified replacement
personnel.
FNCB may be a defendant from time to time in a variety of litigation and other actions, which could have a material
adverse effect on its financial condition, results of operations and cash flows.
FNCB has been and may continue to be involved from time to time in a variety of litigation matters arising out of its business.
An increased number of lawsuits, including purported class action lawsuits and other consumer driven litigation, have been
filed and will likely continue to be filed against financial institutions, which may involve substantial compensatory and/or
punitive damages. Management believes the risk of litigation generally increases during downturns in the national and local
economies. FNCB’s insurance may not cover all claims that may be asserted against it, and any claims asserted against it,
regardless of merit or eventual outcome, may harm its reputation and may cause it to incur significant expense. Should the
ultimate judgments or settlements in any litigation exceed insurance coverage, they could have a material adverse effect on
its financial condition, results of operations and cash flows. In addition, FNCB may not be able to obtain appropriate types
or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all.
For additional discussion of FNCB’s current legal matters, refer to Item 3, “Legal Proceedings” to this Annual Report on
Form 10-K.
FNCB’s disclosure controls and procedures and internal controls over financial reporting may not achieve their intended
objectives.
FNCB maintains disclosure controls and procedures designed to ensure the timely filing of reports as specified in the rules
and forms of the Securities and Exchange Commission. FNCB also maintains a system of internal control over financial
reporting. These controls may not achieve their intended objectives. Control processes that involve human diligence and
compliance, such as its disclosure controls and procedures and internal controls over financial reporting, are subject to lapses
in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper
management override. Because of such limitations, there are risks that material misstatements due to error or fraud may not
be prevented or detected and that information may not be reported on a timely basis. If FNCB’s controls are not effective, it
could have a material adverse effect on its financial condition, results of operations, and market for its common stock, and
could subject it to additional regulatory scrutiny.
14
Risks Related to FNCB’s Common Stock
The price of FNCB’s common shares may fluctuate significantly, which may make it difficult for investors to resell
common shares at a time or price they find attractive.
FNCB’s common stock per share price may fluctuate significantly as a result of a variety of factors, many of which are
beyond its control. These factors include, in addition to those described above:
● actual or anticipated quarterly fluctuations in operating results and financial condition;
● changes in financial estimates or publication of research reports and recommendations by financial analysts or
actions taken by rating agencies with respect to FNCB or other financial institutions;
● speculation in the press or investment community generally or relating to FNCB’s reputation or the financial services
industry;
● strategic actions by FNCB or its competitors, such as acquisitions, restructurings, dispositions or financings;
● fluctuations in the stock price and operating results of FNCB’s competitors;
● future sales of FNCB’s equity or equity-related securities;
● proposed or adopted regulatory changes or developments;
● anticipated or pending investigations, proceedings, audits or litigation that involve or affect FNCB;
● domestic and international economic factors unrelated to FNCB’s performance; and
● general market conditions and, in particular, developments related to market conditions for the financial services
industry.
During 2016, the per share closing bid price of FNCB’s common stock on the OTCQX Marketplace (“OTCQX”) ranged
from a low of $4.75 on August 29, 2016, to a high of $6.90 on February 1, 2016.
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility
has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to
their operating performance. These broad market fluctuations may adversely affect FNCB’s share price, notwithstanding its
operating results. Management expects that the market price of its common shares will continue to fluctuate and there can be
no assurances about the levels of the market prices for its common shares.
An active public market for FNCB’s common stock does not currently exist. As a result, shareholders may not be able to
quickly and easily sell their common shares.
FNCB’s common shares are currently quoted on the OTCQX. During the year ended December 31, 2016, an average of 3,484
shares traded on a daily basis. There can be no assurance that an active and liquid market for FNCB’s common shares will
develop, or if one develops that it can be maintained. The absence of an active trading market may make it difficult for FNCB
shareholder to sell FNCB’s common shares at the prevailing price, particularly in large quantities. For a further discussion,
see Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity
Securities” to this Annual Report on Form 10-K.
FNCB’s ability to pay dividends or repurchase shares is subject to limitations.
FNCB conducts its principal business operations through the Bank and the cash that it uses to pay dividends is derived from
dividends paid to FNCB by the Bank; therefore, its ability to pay dividends is dependent on the performance of the Bank and
on the Bank’s capital requirements. The Bank’s ability to pay dividends to FNCB and FNCB’s ability to pay dividends to its
shareholders are also limited by certain legal and regulatory restrictions.
Risks Related to Government Regulation and Accounting Pronouncements
FNCB is subject to extensive government regulation, supervision and possible regulatory enforcement actions, which may
subject it to higher costs and lower shareholder returns.
The banking industry is subject to extensive regulation and supervision that govern almost all aspects of its operations. The
extensive regulatory framework is primarily intended to protect the federal deposit insurance fund and depositors, not
shareholders. Compliance with applicable laws and regulations can be difficult and costly and, in some instances, may put
banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking
companies, leasing companies and internet-based Fintech companies. FNCB’s regulatory authorities have extensive
discretion in connection with their supervisory and enforcement activities, including with respect to the imposition of
restrictions on the operation of a bank or a bank holding company, the imposition of significant fines, the ability to delay or
15
deny merger or other regulatory applications, the classification of assets by a bank, and the adequacy of a bank’s allowance
for loan losses, among other matters. If they deem FNCB to be operating in a manner inconsistent with safe and sound
banking practices, these regulatory authorities can require the entry into informal and formal supervisory agreements,
including board resolutions, memoranda of understanding, settlement agreements and consent or cease and desist orders,
pursuant to which FNCB would be required to implement identified corrective actions to address cited concerns and/or to
refrain from taking certain actions in the form of injunctive relief. In recent years, the banking industry has faced increased
regulation and scrutiny; for instance, areas such as BSA compliance (including BSA and related anti-money laundering
regulations) and real estate-secured consumer lending (such as Truth-in-Lending regulations, changes in Real Estate
Settlement Procedures Act regulations, implementation of licensing and registration requirements for mortgage originators
and more recently, heightened regulatory attention to mortgage and foreclosure-related activities and exposures) are being
confronted with escalating regulatory expectations and scrutiny. Non-compliance with laws and regulations such as these,
even in cases of inadvertent non-compliance, could result in litigation, significant fines and/or sanctions. Any failure to
comply with, or any change in, any applicable regulation and supervisory requirement, or change in regulation or enforcement
by such authorities, whether in the form of policies, regulations, legislation, rules, orders, enforcement actions, or decisions,
could have a material impact on FNCB, the Bank and other affiliates, and its operations. Federal economic and monetary
policy may also affect FNCB’s ability to attract deposits and other funding sources, make loans and investments, and achieve
satisfactory interest spreads. Any failure to comply with such regulation or supervision could result in sanctions by regulatory
agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on FNCB’s business,
financial condition and results of operations. In addition, compliance with any such action could distract management’s
attention from FNCB’s operations, cause it to incur significant expenses, restrict it from engaging in potentially profitable
activities and limit its ability to raise capital.
The impact of recent legislation, proposed legislation, and government programs designed to stabilize the financial markets
cannot be predicted at this time, and such legislation is subject to change. In addition, any instability in financial markets and
weakening in current financial market conditions could materially and adversely affect FNCB’s business, financial condition,
results of operations and access to capital.
New or changed legislation or regulation and regulatory initiatives could adversely affect FNCB through increased
regulation and increased costs of doing business.
Changes in federal and state legislation and regulation may affect FNCB’s operations. New and modified regulations, such
as the Dodd-Frank Act and Basel III, may have unforeseen or unintended consequences on the banking industry. The Dodd-
Frank Act has implemented significant changes to the U.S. financial system, including the creation of new regulatory agencies
(such as the Financial Stability Oversight Council to oversee systemic risk and the CFPB to develop and enforce rules for
consumer financial products), changes in retail banking regulations, and changes to deposit insurance assessments. For
example, the Dodd-Frank Act has implemented new requirements with respect to “qualified mortgages” and new mortgage
servicing standards that may increase costs associated with this business. For a more detailed description, see the section
entitled “Business – The Bank – Consumer Financial Protection Bureau” included in Item 1 to this Annual Report on Form
10-K.
Additionally, final rules to implement Basel III adopted in July 2013 revise risk-based and leverage capital requirements and
also limit capital distributions and certain discretionary bonuses if a banking organization does not hold the required “capital
conservation buffer.” The rule became effective for FNCB on January 1, 2015, with some additional transition periods. This
additional regulation could increase compliance costs and otherwise adversely affect operations. For a more detailed
description of the final rules, see the description in Item 1 of this Annual Report on Form 10-K under the heading “Capital
Adequacy Requirements”. The potential also exists for additional federal or state laws or regulations, or changes in policy or
interpretations, affecting many of FNCB’s operations, including capital levels, lending and funding practices, insurance
assessments, and liquidity standards. The effect of any such changes and their interpretation and application by regulatory
authorities cannot be predicted, may increase FNCB’s cost of doing business and otherwise affect FNCB’s operations, may
significantly affect the markets in which it does business, and could have a materially adverse effect on FNCB.
FNCB is also subject to the guidelines under the GLB Act. The GLB Act guidelines require, among other things, that each
financial institution develop, implement and maintain a written, comprehensive information security program containing
safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial
institution’s activities and the sensitivity of any customer information at issue. In recent years there also has been increasing
enforcement activity in the areas of privacy, information security and data protection in the United States, including at the
federal level. Compliance with these laws, rules and regulations regarding the privacy, security and protection of customer
and employee data could result in higher compliance and technology costs. In addition, non-compliance could result in
potentially significant fines, penalties and damage to FNCB’s reputation and brand.
16
Changes in accounting standards could impact reported earnings.
From time to time there are changes in the financial accounting and reporting standards that govern the preparation of
financial statements. These changes can materially impact how FNCB records and reports its financial condition and results
of operations. In some instances, FNCB could be required to apply a new or revised standard retroactively, resulting in the
restatement of prior period financial statements.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
FNCB currently conducts business from its headquarters, which also houses the Bank’s main office, located at 102 East
Drinker Street, Dunmore, Pennsylvania, 18512. At December 31, 2016, FNCB also operated 18 additional branches located
throughout Lackawanna, Luzerne and Wayne counties, a loan production office located in Wilkes-Barre, Luzerne County,
Pennsylvania and two administrative offices located in Dunmore, Lackawanna County, Pennsylvania. Fourteen of the offices
are leased and the balance are owned by the Bank. Except for potential remodeling of certain facilities to provide for the
efficient use of work space and/or to maintain an appropriate appearance, each property is considered reasonably suitable and
adequate for current and immediate future purposes.
As part of its responsibilities, management regularly evaluates FNCB’s delivery system and facilities including analyzing
each office’s operating efficiency, location, foot traffic, structure and design. The results of these evaluations may lead to
improvements in FNCB’s delivery system network and facilities including the remodeling, consolidation and/or relocation
of existing facilities and branches and the potential for opening offices and/or branches in new market areas.
On December 21, 2016, the Bank purchased a building located immediately adjacent to its main office at 106-108 East
Drinker Street, Dunmore, Pennsylvania, 18512. On February 15, 2017, the Bank notified the Pennsylvania Department of
Banking and Securities and its federal banking regulators of its intent to open a lending center at this location for the purpose
of housing its commercial and retail lending units. This lending center is scheduled to open at the end of the first quarter of
2017.
On January 6, 2017, the Bank notified the Pennsylvania Department of Banking and Securities and FNCB’s federal banking
regulators of its intent to open a Limited Purpose Office (“LPO”) in Allentown, Lehigh County, Pennsylvania to provide
services related to loan production. This LPO is located in an office leased by the Bank at 3500 Winchester Road, Suites 101
and 102, Allentown, Pennsylvania, 18104. The Pennsylvania Department of Banking and Securities issued a non-objection
letter to the Bank on February 22, 2017 regarding the establishment of the Allentown-based LPO.
Item 3. Legal Proceedings.
On May 24, 2012, a putative shareholder filed a complaint in the Court of Common Pleas for Lackawanna County
(“Shareholder Derivative Suit”) against certain present and former directors and officers of FNCB (the “Individual
Defendants”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste, and unjust enrichment. FNCB
was named as a nominal defendant. The parties to the Shareholder Derivative Suit commenced settlement discussions and on
December 18, 2013, the Court entered an Order Granting Preliminary Approval of Proposed Settlement subject to notice to
shareholders. On February 4, 2014, the Court issued a Final Order and Judgment for the matter granting approval of a
Stipulation of Settlement (the “Settlement”) and dismissing all claims against FNCB and the Individual Defendants. As part
of the Settlement, there was no admission of liability by the Individual Defendants. Pursuant to the Settlement, the Individual
Defendants, without admitting any fault, wrongdoing or liability, agreed to settle the derivative litigation for $5.0 million.
The $5.0 million Settlement payment was made to FNCB on March 28, 2014. The Individual Defendants reserved their rights
to indemnification under FNCB’s Articles of Incorporation and Bylaws, resolutions adopted by the Board, the Pennsylvania
Business Corporation Law and any and all rights they have against FNCB’s and the Bank’s insurance carriers. In addition,
in conjunction with the Settlement, FNCB accrued $2.5 million related to fees and costs of the plaintiff’s attorneys, which
was included in non-interest expense in the consolidated statements of income for the year ended December 31, 2013. On
April 1, 2014, FNCB paid the $2.5 million related to fees and costs of the plaintiff’s attorneys and partial indemnification of
the Individual Defendants in the amount of $2.5 million, and as such, as of September 30, 2016 $2.5 million plus accrued
interest remains accrued in other liabilities related to the potential indemnification of the Individual Defendants.
17
On September 5, 2012, Fidelity and Deposit Company of Maryland (“F&D”) filed an action against FNCB and the Bank, as
well as several current and former officers and directors of FNCB, in the United States District Court for the Middle District
of Pennsylvania. F&D has asserted a claim for the rescission of a directors’ and officers’ insurance policy and a bond that it
had issued to FNCB. On November 9, 2012, FNCB and the Bank answered the claim and asserted counterclaims for the
losses and expenses already incurred by FNCB and the Bank. FNCB and the other defendants are defending the claims and
have opposed F&D’s requested relief by way of counterclaims, breaches of contract and bad faith claims against F&D for its
failure to fulfill its obligations to FNCB and the Bank under the insurance policy. The discovery stage is completed and the
parties have exchanged expert reports. As of the date of this report, the litigation is in the dispositive motion stage. At this
time FNCB cannot reasonably determine the outcome or potential range of loss, if any, in connection with this matter.
On February 16, 2017, FNCB and the Bank entered into a Class Action Settlement Agreement and Release (the “Settlement
Agreement”) in the matters filed in the Court of Common Pleas of Lackawanna County to Steven Antonik, Individually, and
as Administrator of the Estate of Linda Kluska, William R. Howells and Louise A. Howells, Summer Benjamin, and Joshua
Silfee, on behalf of themselves and all others similarly situated vs. First National Community Bancorp, Inc. and First National
Community Bank, Civil Action No. 2013-CV-4438 and Charles Saxe, III, Individually and on behalf of all others similarly
situated vs. First National Community Bank No. 2013-CV-5071 (collectively, the “Actions”). By entering into this Settlement
Agreement, the parties to the Actions have resolved the claims made in the complaints to their mutual satisfaction. FNCB
has not admitted to the validity of any claims or allegations and deny any liability in the claims made and the Plaintiffs have
not admitted that any claims or allegations lack merit or foundation. Under the terms of the Settlement Agreement, the parties
have agreed to the following: 1) FNCB is to pay the Plaintiffs’ class members the aggregate sum of Seven Hundred Fifty
Thousand and 00/100 ($750,000.00)(an amount which FNCB recorded as a liability and corresponding expense in its 2015
operating results); 2) Plaintiffs shall release all claims against FNCB related to the Actions; 3) FNCB shall move to vacate
or satisfy any judgments against any class members arising from the vehicle loans that are the subject of the Actions; 4)
FNCB shall waive the deficiency balance of each class member and remove the trade lines on each class members’ credit
report associated with the subject vehicle loans that are at issue in the Actions for Experian, Equifax and Transunion. The
Settlement Agreement provides for an Incentive Award for the representative Plaintiffs and an award to Plaintiffs’ counsel
of attorney’s fees and reimbursement of expenses in connection with their roles in these Actions, subject to Court Approval.
The Settlement Agreement remains subject to approval by the Court after notice to the class members and a final settlement
hearing. The hearing on the terms of the proposed Settlement Agreement will be to determine whether 1) the terms and
conditions of the settlement provided for in the Settlement Agreement are fair, reasonable and adequate and in the best
interests of the class members; 2) the judgment dismissing the claims of the class members, as provided for in the Settlement
Agreement, shall be entered, and 3) the request of the representative Plaintiffs for the Incentive Award and the Plaintiffs’
counsel for an award for attorney’s fees and reimbursement of expenses shall be granted. As previously mentioned above,
and in connection with, the primary terms of the tentative settlement agreement entered by Order of Court on December 17,
2015, FNCB recorded a liability and corresponding expense in the amount of Seven Hundred Fifty Thousand and 00/100
($750,000.00), which was included in FNCB’s 2015 operating results.
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, claims to enforce liens, condemnation proceedings on properties in which it 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 its consolidated financial condition, results of operations or
liquidity.
Item 4. Mine Safety Disclosures.
Not Applicable.
18
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities.
Market Prices of Stock and Dividends Paid
FNCB’s common shares are quoted on the OTCQX under the symbol “FNCB.” Quarterly market highs and lows and
dividends paid for each of the past two years are presented below. These prices represent actual transactions.
Market Price
High
Low
Quarter
First .............................................................................................. $
Second ..........................................................................................
Third .............................................................................................
Fourth ...........................................................................................
Quarter
First .............................................................................................. $
Second ..........................................................................................
Third .............................................................................................
Fourth ...........................................................................................
2016
6.90 $
6.12
6.00
6.30
2015
6.10 $
6.55
6.05
5.50
Holders
Dividends Paid
Per Share
2016
5.11 $
5.50
4.75
5.00
5.12 $
5.15
5.02
5.06
0.02
0.02
0.02
0.03
0.00
0.00
0.00
0.00
2015
As of February 28, 2017, there were approximately 1,778 holders of record of FNCB’s common shares. Because many of
FNCB’s shares are held by brokers and other institutions on behalf of shareholders, FNCB is unable to estimate the total
number of shareholders represented by these record holders.
Dividends
FNCB had been under a Written Agreement with the Federal Reserve Bank of Philadelphia from November 24, 2010 until it
was fully and completely released from the enforcement action on September 2, 2015. The Bank had been under a Consent
Order with the Office of the Comptroller of the Currency from September 1, 2010 until it was fully and completely released
from the enforcement action on March 25, 2015. While under the Written Agreement, FNCB was precluded from paying
dividends, and accordingly, did not pay dividends to shareholders during the tenure of the Written Agreement. FNCB resumed
quarterly dividend payments effective with a quarterly dividend paid on March 15, 2016. It is the present intent of the Board
of Directors to continue paying quarterly dividends going forward. However, FNCB’s ability to declare and pay future
dividends is dependent upon earnings, financial position, appropriate restrictions under applicable laws, legal and regulatory
restrictions and other factors relevant at the time FNCB’s Board of Directors considers any declaration of any dividends. For
a further discussion of FNCB’s and the Bank’s dividend restrictions, refer to Note 14, “Regulatory Matters/Subsequent
Events” in the notes to consolidated financial statements to this Annual Report on Form 10-K.
In addition to the resumption of dividend payments, on April 27, 2016, FNCB’s Board of Directors approved the
reinstatement of the Dividend Reinvestments and Stock Purchase Plan effective June 1, 2016.
Equity Compensation Plans
For more information regarding FNCB’s equity compensation plans, see Part III, Item 12, “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters” in this Annual Report on Form 10-K.
19
Performance Graph
The following graph compares the cumulative total shareholder return (i.e. price change, reinvestment of cash dividends and
stock dividends received) on FNCB’s common shares against the cumulative total return of the NASDAQ Stock Market
(U.S. Companies) Index, the SNL Bank Index for banks with $500 million to $1 billion in assets and the SNL U.S. Bank
Pink for banks traded on the OTC with total assets greater than $500 million. The stock performance graph assumes that
$100 was invested on December 31, 2011. The graph further assumes the reinvestment of dividends into additional shares of
the same class of equity securities at the frequency with which dividends are paid on such securities during the relevant fiscal
year. The yearly points marked on the horizontal axis correspond to December 31 of that year. FNCB calculates each of the
referenced indices in the same manner. All are market-capitalization-weighted indices, so companies judged by the market
to be more important (i.e. more valuable) count for more in all indices.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
Recent Sales of Unregistered Securities
None.
20
Item 6. Selected Financial Data
The selected consolidated financial and other data and management’s discussion and analysis of financial condition and
results of operations set forth below and in Item 7 hereof is derived in part from, and should be read in conjunction with,
FNCB’s consolidated financial statements and notes thereto contained elsewhere herein. Certain reclassifications have been
made to prior years’ consolidated financial statements to conform to the current year’s presentation. Those reclassifications
did not impact net income.
For the Years Ended December 31,
2014
2015
2013
2016
(dollars in thousands, except per share data)
Balance Sheet Data:
Total assets ........................................................... $ 1,195,375 $ 1,090,618 $
272,676
253,773
Securities, available-for-sale ................................
-
Securities, held-to-maturity ..................................
-
724,926
Net loans ..............................................................
725,860
821,546
Total deposits ....................................................... 1,015,139
160,112
78,847
Borrowed funds ....................................................
86,178
90,147
Shareholders' equity .............................................
970,029 $ 1,003,808 $
203,867
218,989
2,308
-
629,880
658,747
884,698
795,336
62,433
96,504
33,578
51,398
2012
968,274
185,361
2,198
579,396
854,613
53,903
36,925
Income Statement Data:
Interest income ..................................................... $
Interest expense ....................................................
Net interest income before provision (credit) for
loan and lease losses ..........................................
Provision (credit) for loan and lease losses ..........
Non-interest income ............................................
Non-interest expense ............................................
Income (loss) before income taxes .......................
Income tax expense (benefit) ...............................
Net income (loss) .................................................
Earnings (loss) per share, basic and diluted .........
Capital and Related Ratios:
Cash dividends declared per share ....................... $
Book value per share ............................................
Tier I leverage ratio ..............................................
Total risk-based capital to risk-adjusted assets ....
Average equity to average total assets (1) ............
Tangible equity to tangible assets ........................
Selected Performance Ratios:
Return on average assets (1) .................................
Return on average equity (1) ................................
Net interest margin (2) .........................................
Noninterest income/operating income (2) ............
Asset Quality Ratios:
Allowance for loan and lease losses/total loans ...
Nonperforming loans/total loans ..........................
Allowance for loan and lease
losses/nonperforming loans ...............................
Net charge-offs/average loans ..............................
Loan loss provision/net charge-offs .....................
34,748 $
4,197
32,201 $
4,801
32,673 $
6,147
32,953 $
7,176
37,027
9,218
30,551
1,153
6,203
27,545
8,056
1,747
6,309
0.38
27,400
(1,345)
7,800
28,464
8,081
(27,759)
35,840
2.17
26,526
(5,869)
14,920
33,569
13,746
326
13,420
0.81
25,777
(6,270)
9,283
34,948
6,382
-
6,382
0.39
27,809
4,065
4,283
41,738
(13,711)
-
(13,711)
(0.83)
0.09 $
5.42
7.53%
12.06%
8.42%
7.54%
- $
5.22
7.27%
11.79%
5.64%
7.89%
- $
3.12
6.05%
13.67%
4.66%
5.27%
- $
2.04
4.71%
11.58%
3.60%
3.30%
-
2.24
4.07%
10.20%
3.97%
3.75%
0.57%
6.82%
3.13%
14.88%
3.57%
63.24%
2.99%
18.73%
1.38%
29.50%
3.08%
30.30%
0.67%
18.65%
3.21%
20.79%
(1.35%)
(34.09%)
3.26%
9.71%
1.15%
0.31%
1.20%
0.52%
1.72%
0.82%
2.18%
0.99%
3.10%
1.62%
376.86%
0.21%
75.66%
232.05%
0.20%
***
208.62%
(0.51%)
***
219.87%
(0.28%)
***
190.92%
0.97%
63.88%
*** Ratio is not meaningful for 2015, 2014 and 2013.
(1) Average balances were calculated using average daily balances. Average balances for loans include non-accrual loans.
(2) Tax-equivalent adjustments were calculated using the prevailing statutory rate of 34.0 percent.
21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (“MD&A”) represents an overview of the financial condition and results of operations
of FNCB and should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8
and Risk Factors detailed in Item 1A of Part I to this Annual Report on Form 10-K.
FNCB is in the business of providing customary retail and commercial banking services to individuals, businesses and local
governments and municipalities within its primary market area located in Northeastern Pennsylvania.
FORWARD-LOOKING STATEMENTS
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 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,” “would,” “believe,”
“anticipate,” “estimate,” “expect,” “intend,” “plan” 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 strength of the
United States economy in general and the strength of the local economies in our markets; the effects of, and changes in trade,
monetary, corporate tax and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal
Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new
products and services; the ability of FNCB to compete with other institutions for business; the composition and concentrations
of FNCB’s lending risk and the adequacy of our reserves to manage those risks; the valuation of FNCB’s investment
securities; the ability of FNCB to pay dividends or repurchase common shares; the ability of FNCB to retain key personnel;
the impact of any pending or threatened litigation against FNCB; the marketability of shares of FNCB and fluctuations in the
value of FNCB’s share price; the effectiveness of FNCB’s system of internal controls; the ability of FNCB to attract additional
capital investment; the impact of changes in financial services’ laws and regulations (including laws concerning capital
adequacy, taxes, banking, securities and insurance); the impact of technological changes and security risks upon our
information technology systems; changes in consumer spending and saving habits; the nature, extent, and timing of
governmental actions and reforms, 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.
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 allowance for loan
and lease losses (“ALLL”), securities’ valuation and impairment evaluation, and 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.
22
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 for 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 nonaccrual status above the $100 thousand loan relationship threshold and all loans considered troubled debt
restructurings (“TDRs”) are classified as impaired.
See Note 2,“Summary of Significant Accounting Policies” and Note 5, “Loans” of the notes to consolidated financial
statements included in Item 8,“Financial Statements and Supplementary Data” to this Annual Report on Form 10-K 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 4,“Securities” and Note 15, “Fair Value Measurements” of the notes to consolidated
financial statements included in Item 8, “Financial Statements and Supplementary Data” to this Annual Report on Form 10-
K 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 analysis of 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 years
ended December 31, 2016, 2015 and 2014 within the consolidated statements of income.
See Note 2, “Summary of Significant Accounting Policies” and Note 4, “Securities” of the notes to consolidated financial
statements included in Item 8, “Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for
additional information about valuation of securities.
23
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 operations or for future expansion. OREO is held for sale and is initially recorded
at fair value less 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 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, including alternative minimum 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.
On December 31, 2010, management established a valuation allowance equal to 100 percent of FNCB’s net deferred tax
asset, excluding deferred tax assets and liabilities related to unrealized holding gains and losses on available-for-sale
securities, and maintained such an allowance through December 31, 2014. As part of its evaluation conducted as of December
31, 2015, management reviewed all the positive and negative evidence available at that time and concluded that significant
positive evidence outweighed any negative evidence and the valuation allowance previously established for FNCB’s deferred
tax assets should be reversed, except for the amount established for charitable contribution carryovers. Management’s
subsequent evaluation as of December 31, 2016 concluded that the previously established valuation allowance for charitable
contributions should be reversed, and as such, FNCB did not have any valuation allowances for deferred tax assets as of
December 31, 2016.
FNCB uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. The Trump Administration
and the U.S. Congress are in the process of evaluating possible tax changes which may include a reduction in the U.S.
corporate income tax rates. If corporate tax rates were reduced, management expects FNCB would be required to record an
initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would
record lower tax provisions on an ongoing basis. There is no specific proposal currently pending. Management cannot assess
the effect a change in the corporate tax rate would have on FNCB’s operating results or financial position at the present time.
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 December 31, 2016 and 2015, management determined that FNCB did not have any uncertain tax positions or tax
strategies and that no liability was required to be recorded.
24
See Note 2, “Summary of Significant Accounting Policies” and Note 10, “Income Taxes” of the notes to consolidated
financial statements included in Item 8, “Financial Statements and Supplementary Data” to this Annual Report on Form
10-K for additional information about the accounting for income taxes.
New Authoritative Accounting Guidance and Accounting Guidance to be Adopted in Future Periods
For information regarding new authoritative accounting guidance adopted by FNCB during the year ended December 31,
2016 and accounting guidance that FNCB will adopt in future periods, see Note 2, “Summary of Significant Accounting
Policies” of the notes to consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”
to this Annual Report on Form 10-K.
EXECUTIVE OVERVIEW
The following overview should be read in conjunction with this MD&A in its entirety.
On June 30, 2016, First National Community Bancorp, Inc., the parent company of First National Community Bank,
announced that following receipt of required regulatory approvals from the Pennsylvania Department of Banking and
Securities, First National Community Bank had completed a charter conversion from a national bank to a Pennsylvania state
bank and, as a result of the conversion, First National Community Bank changed its legal name to FNCB Bank. Both the
charter conversion and legal name change were effective June 30, 2016. On October 4, 2016, First National Community
Bancorp, Inc., the parent company of FNCB Bank, filed an amendment to its articles of incorporation to change its name,
effective October 17, 2016, to “FNCB Bancorp, Inc.” The Board of Directors of FNCB has also amended the bylaws of
FNCB, effective October 17, 2016, to reflect the new name.
On May 18, 2016, FNCB announced that effective June 30, 2016, Steven R. Tokach would retire from his position as
President and Chief Executive Officer and a member of the Boards of Directors of both FNCB and the Bank. On the same
day, both Boards of Directors appointed Gerard A. Champi as his successor effective July 1, 2016. Mr. Champi was appointed
as a Class A director of FNCB, with a term expiring at the 2017 annual meeting of shareholders, filling the vacancy created
by Mr. Tokach’s retirement. Mr. Champi has been with the Bank since 1991 and has served in various leadership positions,
including, most recently, Chief Operating Officer since March 2011 and Interim President and Chief Executive Officer of
FNCB and the Bank from March 2010 until February 2011.
Results of Operations
FNCB reported earnings in 2016 of $6.3 million, or $0.38 per diluted common share, a decrease of $29.5 million, or 82.4%,
compared to $35.8 million, or $2.17 per diluted common share, in 2015. The decrease in net income was largely attributable
to the reversal of the deferred tax asset (“DTA”) valuation allowance of $30.0 million in 2015, resulting in an income tax
benefit of $27.8 million for the year ended December 31, 2015. The decrease in 2016 net income compared to 2015
attributable to the reversal was offset in part by strong improvement in net interest income and continued reductions in non-
interest expense levels. Net interest income improved $3.1 million, or 11.5%, to $30.5 million in 2016 from $27.4 million in
2015. The improvement resulted primarily from solid growth in interest earning assets, higher yields on taxable loans and
investments and reduced borrowing costs. Non-interest expense decreased $0.9 million, or 3.2%, to $27.6 million in 2016
from $28.5 million in 2015. FNCB experienced significant reductions in occupancy expense, regulatory assessments and
insurance costs. In addition, FNCB recorded $0.8 million in non-recurring expense related to a legal settlement in 2015.
Partially offsetting these cost reductions were increases in salaries and employee benefit costs and bank shares tax. These
positive factors were offset by a $1.6 million reduction in non-interest income and a provision for loan and lease losses of
$1.2 million in 2016 compared to a credit of $1.3 million in 2015.
Return on average assets and return on average shareholders’ equity equaled 0.57% and 6.82%, respectively, in 2016,
compared to 3.57% and 63.24%, respectively, in 2015. For the three months ended December 31, 2016, return on average
assets and return on average shareholders’ equity were 0.55% and 6.43%, respectively, compared to 10.99% and 192.68%,
respectively, for the same three months of 2015. FNCB paid dividends to holders of common stock of $0.09 per share for the
year ended December 31, 2016. FNCB did not pay any dividends during the year ended December 31, 2015.
Balance Sheet Profile
Total assets increased $104.8 million, or 9.6%, to $1.2 billion at December 31, 2016 from $1.1 billion at December 31, 2015.
The growth in the balance sheet reflected an increase in total deposits of $193.6 million, or 23.6%, to $1.0 billion at December
31, 2016 from $0.8 billion at the end of 2015, which was used to pay down FHLB advances of $77.3 million, and fund net
increases in loans, net of deferred costs and unearned income of $0.6 million, available-for-sale securities of $18.9 million,
25
and cash and cash equivalents of $91.4 million. Specifically, non-interest-bearing demand deposits increased $19.2 million,
or 12.4%, and interest-bearing deposits increased $174.4 million, or 26.2%. The increase in non-interest bearing demand
deposits primarily reflected growth in business checking accounts, while the increase in interest-bearing deposits was due to
growth in municipal deposit accounts. Additionally, on March 1, 2016, FNCB repaid in its entirety $10.8 million in accrued
interest that it had been previously deferring on the subordinated debentures for the period September 1, 2010 through May
31, 2015, as well as accelerated the $4.0 million principal payment on the subordinated debentures due September 1, 2017,
to December 1, 2016.
Total shareholders’ equity improved $4.0 million, or 4.6%, to $90.1 million at December 31, 2016 from $86.2 million at the
end of 2015, which resulted primarily from net income for 2016 of $6.3 million, partially offset by a $1.5 million increase in
accumulated other comprehensive loss resulting from depreciation in the market value, net of tax, of FNCB’s available-for-
sale securities, due to changes in market interest rates. Also affecting shareholders’ equity were dividends declared and paid
of $1.5 million, common shares issued through the dividend reinvestment and optional cash purchase plans of $0.4 million
and stock-based compensation of $0.3 million.
At December 31, 2016, FNCB’s total risk-based capital ratio and the Tier 1 leverage ratio were 12.06% and 7.53%,
respectively. The respective ratios for the Bank at December 31, 2016 were 12.81% and 8.63%. The ratios for both FNCB
and the Bank exceeded the 10.00% and 5.00% required to be well capitalized under the prompt corrective action provisions
of the Basel III capital framework for U.S. banking organizations.
Management’s Focus in 2016
Following the recognition of FNCB’s deferred tax assets in 2015, management focused its attention in 2016 on utilizing
FNCB’s improved capital position to reduce leverage at the holding company level and enhance value for its shareholders
through the resumption of quarterly dividend payments and reinstituting the dividend reinvestment and optional cash
purchase plans (“DRP”). In addition, management strategies and initiatives in 2016 were aimed at increasing core deposits
through collaboration between FNCB’s retail and commercial banking units and the addition of a governmental banking
department and improving financial performance and efficiency.
.
With respect to reducing leverage at the holding company level, on March 1, 2016, FNCB repaid $10.8 million in accrued
interest that had previously been deferred on the subordinated debentures (“Notes”) for the period September 1, 2010 through
May 31, 2015. FNCB had resumed paying interest on the Notes effective with the June 1, 2015 payment and has continued
making the quarterly interest payments. In addition, FNCB accelerated a $4.0 million principal payment on the Notes which
was originally scheduled for September 1, 2017 to December 1, 2016. As a result, principal and accrued interest on the Notes
together decreased $14.9 million, or 59.7%, to $10.0 million at December 31, 2016 from $24.9 million at December 31,
2015.
On March 15, 2016, FNCB resumed paying quarterly dividends with the payment of a $0.02 per share dividend, the first
dividend payment since the fourth quarter of 2009. FNCB declared and paid dividends of $0.02 per share for each of the
second and third quarters of 2016 and increased the dividend to $0.03 per share for the fourth quarter of 2016. The Bank and
FNCB had previously suspended paying dividends in 2010 through 2015 in an effort to conserve capital while operating
under a Consent Order and Written Agreement, which they were released from in 2015. In addition to paying quarterly
dividends, FNCB reinstituted the DRP effective with the second quarter dividend payment on June 15, 2016. Common shares
issued through the plan in 2016 following reinstatement were 78,752 shares. Furthermore, on January 25, 2017, the Board of
Directors declared a dividend of $0.03 per share for the first quarter of 2017, an increase of 50.0% compared to the first
quarter of 2016. The dividend is payable on March 15, 2017 to shareholders of record on March 1, 2017.
During the second quarter of 2016, FNCB formed a governmental banking department in order to develop banking
relationships within the municipal sector. Also, during the second quarter of 2016, FNCB launched the “WOW ME” suite of
personal deposit products, which include a high-yield checking account and savings account. Customers are able to earn an
annual percentage yield (“APY”) of 2.00% on balances up to $10 thousand for the checking account, an APY of 1.00% on
balances up to $25 thousand held in a related savings account and an APY of 0.50% on balances greater than these thresholds.
In order to earn these APYs customers must meet certain qualifications, including a monthly direct deposit, a minimum of
12 debit card or ACH transactions per month, and an election to have monthly statements delivered electronically. The
formation of the governmental banking department, along with collaboration between the commercial and retail banking
units and new WOW ME products, contributed to the 23.6% growth in total deposits.
Management monitors several key metrics in evaluating FNCB’s financial performance. Specifically, a main objective of
FNCB’s management team is improving the Bank’s efficiency ratio in order to drive its overall financial performance. The
efficiency ratio is a key industry metric and indicator of a bank’s profitability. The efficiency ratio is computed by dividing
26
non-interest expense by the sum of tax-equivalent net interest income and non-interest income. Management also monitors
this metric in comparison to the Bank’s peer group. The Bank has experienced significant improvement in its efficiency, as
its non-interest expense levels have normalized over recent years. This is evidenced by solid improvement in the efficiency
ratio. The Bank’s efficiency ratio, which was 72.76% in 2016, improved 8.7% from 79.67% in 2015, and 14.1% from 84.71%
in 2014. Despite the improvement, the Bank lags behind its peer group with respect to efficiency. According to the Uniform
Bank Performance Report, banks within peer group 2 (with total assets between $1.0 and $3.0 billion) had an average
efficiency ratio of 63.70% in 2016.
Looking Ahead to 2017
For 2017, management plans to continue to focus on improving efficiency to drive long-term financial performance. With
non-interest expense near normal levels, management is also focused on increasing net interest income through commercial
and retail loan growth initiatives and developing additional sources of non-interest income.
As part of its responsibilities, management regularly evaluates FNCB’s delivery system and facilities including analyzing
each office’s operating efficiency, location, foot traffic, structure and design. The results of these evaluations may lead to
improvements in FNCB’s delivery system network and facilities including the remodeling, consolidation and/or relocation
of existing facilities and branches and the potential for opening offices and/or branches in new market areas.
On December 21, 2016, the Bank purchased a building located immediately adjacent to its main office in Dunmore,
Lackawanna County, Pennsylvania to open a lending center that will house part of its commercial and retail lending units.
This lending center is expected to open by the end of the first quarter of 2017. In addition, on January 20, 2017, FNCB opened
a loan production office in Allentown, Lehigh County, Pennsylvania and began offering its retail and commercial lending
products in this new market area.
Summary of Performance
Net Interest Income
2016 compared to 2015
Net interest income is the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest
expense, interest paid on deposits and borrowed funds. Net interest income represents the largest component of FNCB’s
operating income and, as such, is the primary determinant of profitability. 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 shown on a fully tax-equivalent basis and is calculated by adjusting tax-
free interest using a marginal tax rate of 34.0% in order to equate the yield to that of taxable interest rates.
Tax-equivalent net interest income in 2016 improved $3.2 million to $31.3 million compared to $28.1 million in 2015. The
11.2% increase in tax-equivalent net interest income primarily reflected a $2.5 million increase in tax-equivalent interest
income, coupled with a $0.6 million reduction in interest expense. Tax-equivalent interest income was positively impacted
by an increase in average earning assets, coupled with a slight increase in the yield earned on loans and investment securities.
The decrease in interest expense largely reflected a full year of the modification of the interest rate of the Notes from 9.0%
to 4.5% during 2015, which had a positive effect on funding costs. In addition, FNCB’s cost of funds was also favorably
impacted by a reduction in the rate paid on other time deposits, as higher-costing certificates of deposit matured and were
reinvested at lower rates.
FNCB’s tax-equivalent interest margin improved 14 basis points to 3.13% in 2016 from 2.99% in 2015. 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. 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, was 3.05% for the year ended December 31, 2016, an increase of 16 basis points
compared to 2.89% for the year ended December 31, 2015.
Tax-equivalent interest income increased $2.5 million, or 7.7%, to $35.5 million in 2016 from $32.9 million in 2015. The
growth in tax-equivalent interest income reflected strong growth in interest-earning assets, as average loans increased $35.0
million, or 5.0%, resulting in an increase to tax-equivalent interest income of $1.4 million, and average investments increased
$34.4 million or 15.1%, resulting in an increase to tax-equivalent interest income of $0.8 million. Accompanying the growth
in average earning assets was a 5-basis point improvement in the tax-equivalent yield on average earning assets to 3.55% in
2016 from 3.50% in 2015. Specifically, the tax-equivalent yield earned on the loan portfolio increased 2 basis points, while
27
the tax-equivalent yield earned on the investment portfolio increased 5 basis points, each of which contributed $0.2 million
to the improvement in tax-equivalent interest income. The tax-equivalent yield earned on interest-bearing deposits in other
banks improved 22 basis points, reflecting the 25-basis point increase in the federal funds target rate in December, 2015.
However, the increase was more than offset by a decrease in the average balance of interest-bearing deposits in other banks
of $11.0 million, or 60.8%.
Interest expense decreased $0.6 million, or 12.6%, to $4.2 million in 2016 from $4.8 million in 2015. The decrease in interest
expense was driven almost entirely by an 11 basis point decrease in the cost of funds to 0.50% in 2016 compared to 0.61%
in 2015, which resulted in a $0.6 million corresponding decrease in interest expense due to changes in rates. Specifically, the
modification of the interest rate on the subordinated debentures from 9.0% to 4.5% effective July 1, 2015 had the greatest
impact on interest expense, as it was the leading factor driving a 59 basis point decrease in the cost of borrowed funds to
1.42% in 2016 from 2.01% in 2015. The decrease in borrowing costs resulted in a $0.6 million reduction in interest expense.
Partially offsetting the decrease in borrowing costs was a slight increase in FNCB’s cost of interest-bearing demand deposits,
savings deposits and time deposits over $100,000 of 3 basis points, 3 basis points, and 2 basis points, respectively, all of
which more than offset a 12 basis point decrease in the cost of other time deposits. Changes in the average deposit rates
resulted in a $34 thousand increase in interest expense.
Average interest-bearing liabilities increased $61.8 million, or 7.9%, to $844.3 million in 2016 from $782.5 million in 2015.
Despite the increase, changes in the volumes of interest-bearing liabilities resulted in a $34 thousand decrease in interest
expense, as a reduction in average borrowed funds more than offset an increase in average interest-bearing deposits.
Specifically, a $4.7 million, or 4.4%, decrease in average borrowed funds, resulted in a reduction to interest expense of $99
thousand. The decline in interest expense paid on borrowed funds was partially offset by a $65 thousand increase in interest
expenses resulting from a $66.5 million increase in average interest-bearing deposits. An increase in municipal deposits was
the primary factor contributing to an increase of $76.7 million, or 21.4%, in average interest-bearing demand deposits, which
led to an increase in interest expense of $158 thousand. In addition, other time deposits increased $2.7 million, or 2.2%,
which caused a corresponding increase in interest expense of $27 thousand. Partially offsetting these increases was a decrease
in the average balance of time deposits over $100,000 of $18.5 million, or 18.9%, which resulted in a $124 thousand reduction
in interest expense.
2015 compared to 2014
Comparing the years ended December 31, 2015 and 2014, tax-equivalent net interest income was stable, decreasing only $40
thousand, or 0.1%. FNCB’s tax-equivalent net interest margin contracted 9 basis points to 2.99% in 2015 from 3.08% in
2014, while the rate spread decreased 6 basis points to 2.89% in 2015 compared to 2.95% in 2014. FNCB’s net interest
margin and rate spread were impacted by several strategic tax planning and Asset/Liability Management Committee
(“ALCO”) initiatives in 2015, as well as an ongoing challenging rate environment and competitive pressures that continued
to impact loan pricing.
In 2015, management continued tax planning strategies designed to generate taxable income and reduce the amount of credit
and concentration risk within the investment portfolio. Accordingly, management continued repositioning the investment
portfolio by selling the majority of its tax-exempt obligations of state and political subdivisions and replacing them with
taxable obligations of U.S. government and government-sponsored agencies including collateralized mortgage obligations
(“CMOs”), residential mortgage-backed securities and single-maturity bonds. The effect of this repositioning was the primary
factor leading to a $1.4 million, or 20.2%, decrease in tax-equivalent interest income generated from the investment portfolio.
Yields on the lending portfolio were forced down, reflecting competitive pressures for commercial loans within our market
area, promotions involving lower-yielding short-term residential mortgage products and indirect auto loans, along with a
prolonged depressed rate environment, but were more than offset by increased demand for FNCB’s loan products.
Tax-equivalent interest income decreased $1.4 million, or 4.0%, to $32.9 million in 2015 from $34.3 million in 2014. Tax-
equivalent interest income was significantly impacted by the repositioning of the investment portfolio from tax-exempt
obligations of state and political subdivisions to taxable investments. As a result, the average balance of tax-exempt
investments decreased $37.9 million, or 94.0%, which caused a $2.6 million corresponding decrease to tax-equivalent interest
income. The average balance of taxable investments increased $45.1 million, or 25.0%, but was only able to mitigate the
decrease by $1.1 million. The tax-equivalent yield on the investment portfolio decreased 71 basis points from 3.15% in 2014
to 2.44% in 2015. However, a 12 basis point increase in the yield on taxable investment securities more than offset the effects
of a 25 basis point decrease in the yield on tax-exempt investment securities. Overall, changes in the volumes and rates on
the investment portfolio resulted in a $1.4 million decrease in tax-equivalent interest income in 2015. Strong loan demand
during 2015 resulted in a $30.3 million, or 4.5% increase in average total loans, resulting in additional tax-equivalent interest
income of $1.2 million. However, the additional interest income was entirely offset by a 17 basis point decline in the tax-
28
equivalent yield on the loan portfolio due to the factors described above, which caused a corresponding decrease in tax-
equivalent interest income of $1.2 million.
However, the effects of the securities portfolio repositioning and declining loan yields were almost entirely mitigated by a
$1.3 million, or 21.9%, reduction in interest expense, driven primarily by a 19 basis point decrease in the cost of funds, which
resulted in a $1.4 million corresponding decrease in interest expense due to changes in rates. Specifically, the modification
of the interest rate on the subordinated debentures from 9.0% to 4.5% had the greatest impact on interest expense, as it was
the leading factor driving a 116 basis point decrease in the cost of borrowed funds, resulting in a $1.2 million reduction in
interest expense. In addition, the cost of deposits decreased 8 basis points, which resulted from decreases in the cost of time
deposits over $100,000 and other time, partially offset by an increase in the average rate paid for interest-bearing demand
deposits. Changes in the average deposit rates resulted in a $0.2 million decrease in interest expense.
Average interest-bearing liabilities increased $11.0 million, or 1.4%, to $782.5 million in 2015 from $771.5 million in 2014.
Specifically, a $14.3 million, or 15.2%, increase in average borrowed funds resulted in additional interest expense of $0.4
million. The additional interest from borrowed funds was almost entirely offset by a $0.3 million reduction in interest
expenses resulting from a $3.2 million decrease in average interest-bearing deposits. One of FNCB’s ALCO initiatives in
2015 included the replacement of higher-costing certificates of deposit originated through a national deposit listing service
and maturing certificates of deposit bearing higher interest rates with lower-costing brokered deposits and FHLB of Pittsburgh
advances.
29
Non-accrual loans
The interest income that would have been earned on non-accrual and restructured loans outstanding at December 31, 2016,
2015 and 2014 in accordance with their original terms approximated $221 thousand, $406 thousand and $406 thousand,
respectively. Interest income on impaired loans of $202 thousand, $258 thousand, and $235 thousand was recognized based
on payments received in 2016, 2015 and 2014, respectively.
The following table presents the components of net interest income for each of the three years ended December 31, 2016,
2015 and 2014:
Summary of Net Interest Income
Year ended December 31,
Year ended December 31,
2016
2015
Year ended December 31,
2014
(dollars in thousands)
ASSETS
Earning assets (2)(3)
Average
Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Yield/ Average
Yield/ Average
Loans-taxable (4) ........................ $ 685,289 $ 26,853 3.92% $ 654,470 $ 25,360 3.87% $ 625,969 $ 25,316 4.04 %
42,135 1,988 4.72% 40,370 1,989 4.93 %
Loans-tax free (4) ........................
696,605 27,348 3.93% 666,339 27,305 4.10 %
Total loans (1)(2) ................
224,955 5,374 2.39% 179,903 4,090 2.27 %
Securities-taxable ........................
Securities-tax free .......................
165 6.82% 40,277 2,853 7.08 %
227,374 5,539 2.44% 220,180 6,943 3.15 %
Total securities (1)(5) ..........
46,305 2,076 4.48%
731,594 28,929 3.95%
260,624 6,446 2.47%
70 5.87%
261,816 6,516 2.49%
2,419
1,192
Interest-bearing deposits in other
banks .......................................
33 0.47%
Total earning assets ............. 1,000,499 35,478 3.55%
7,089
18,076
71 0.25 %
942,055 32,933 3.50% 915,248 34,319 3.75 %
46 0.25% 28,729
Non-earning assets ......................
Allowance for loan and lease
107,061
losses .......................................
(8,684)
Total assets .......................... $ 1,098,876
73,587
73,713
(10,729)
$ 1,004,913
(13,094)
$ 975,867
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Interest-bearing demand deposits $ 435,092
97,188
Savings deposits ..........................
Time deposits over $100,000 ......
79,193
Other time deposits .....................
973 0.22% $ 358,442
91,603
94 0.10%
97,687
573 0.72%
129,590 1,090 0.84%
453 0.14 %
672 0.19% $ 320,780
60 0.07% 88,678
57 0.06 %
679 0.70% 135,871 1,048 0.77 %
126,851 1,220 0.96% 132,489 1,622 1.22 %
Total interest-bearing
deposits ...........................
741,063 2,730 0.37%
674,583 2,631 0.39% 677,818 3,180 0.47 %
Borrowed funds and other
interest-bearing liabilities ........
Total interest-bearing liabilities ..
Demand deposits .........................
Other liabilities............................
Shareholders' equity ....................
Total liabilities and
103,239 1,467 1.42%
844,302 4,197 0.50%
148,746
13,263
92,565
107,965 2,170 2.01% 93,694 2,967 3.17 %
782,548 4,801 0.61% 771,512 6,147 0.80 %
139,945
25,744
56,676
134,132
24,724
45,499
shareholders' equity ........ $ 1,098,876
$ 1,004,913
$ 975,867
Net interest income/interest rate
apread (6) ................................
Tax equivalent adjustment ..........
Net interest income as reported ...
31,281 3.05%
28,132 2.89%
(730)
$ 30,551
(732)
$ 27,400
28,172 2.95 %
(1,646)
$ 26,526
Net interest margin (7) ................
3.13%
2.99%
3.08 %
(1) Interest income is presented on a tax-equivalent basis using a 34% 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 are 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 average interest
bearing liabilities and is presented on a tax equivalent basis.
(7) Net interest income as a percentage of total average interest earning assets.
30
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 statutory federal income tax rate of 34%.
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.
For the Year Ended December 31,
For the Year Ended December 31,
2016 vs. 2015
2015 vs. 2014
(in thousands)
Interest Income:
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Volume
Volume
Total
Total
Rate
Rate
Loans - taxable ....................... $
Loans - tax free ......................
Total loans.......................
Securities - taxable .................
Securities - tax free ................
Total securities ................
Interest-bearing deposits in
1,205 $
190
1,395
877
(74)
803
288 $
(102)
186
195
(21)
174
1,493 $
88
1,581
1,072
(95)
977
1,128 $
85
1,213
1,067
(2,586)
(1,519)
(1,084) $
(86)
(1,170)
217
(102)
115
44
(1)
43
1,284
(2,688)
(1,404)
other banks ...........................
Total interest income ...
(38)
2,160
25
385
(13)
2,545
(27)
(333)
2
(1,053)
(25)
(1,386)
Interest Expense:
Interest-bearing demand
deposits ................................
Savings deposits .....................
Time deposits over $100,000 .
Other time deposits ................
Total interest-bearing
158
4
(124)
27
143
30
18
(157)
301
34
(106)
(130)
58
2
(316)
(67)
161
1
(53)
(335)
219
3
(369)
(402)
deposits .........................
65
34
99
(323)
(226)
(549)
Borrowed funds and other
interest-bearing liabilities ....
Total interest expense ..
Net Interest Income ...................... $
Provision for Loan and Lease Losses
(99)
(34)
2,194 $
(604)
(570)
955 $
(703)
(604)
3,149 $
403
80
(413) $
(1,200)
(1,426)
373 $
(797)
(1,346)
(40)
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. 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 credit to loan and lease losses reflects the reversal of amounts
previously charged to the ALLL.
2016 compared to 2015
For the year ended December 31, 2016, FNCB recorded a provision for loan and lease losses of $1.2 million compared to a
credit for loan and lease losses of $1.3 million for the year ended December 31, 2015. The provision for loan and lease losses
in 2016 was due largely to net charge-offs of $1.5 million during 2016. Net charge-offs within the commercial real estate,
commercial and industrial and consumer segments were the most elevated, totaling $0.4 million, $0.6 million, and $0.4
million, respectively.
31
2015 compared to 2014
FNCB recorded a credit for loan and lease losses of $1.3 million in 2015, compared to a credit of $5.9 million in 2014. The
credit for loan and lease losses in 2015 was due largely to improvement in FNCB’s historical loss and certain qualitative
factors and levels of classified loans. The balance of loans classified as “Substandard” decreased $8.9 million, or 34.7%, to
$16.8 million at December 31, 2015 from $25.7 million at the end of 2014.
The credit for loan and losses during 2014 was primarily attributable to the receipt of a substantial legal settlement in the
amount of $5.8 million resulting from judgments filed by FNCB pursuant to a large credit relationship. Of the total amount
received, $3.6 million represented full recovery of previously charged-off loans, which was the primary factor leading to the
credit for loan and lease losses.
Non-Interest Income:
The following table presents the components of non-interest income for the years ended December 31, 2016, 2015 and 2014:
Components of Non-Interest Income
(in thousands)
Deposit service charges ................................................................ $
Net gain on the sale of securities ..................................................
Net gain on the sale of mortgage loans held for sale ....................
Net gain on the sale of SBA guaranteed loans .............................
Net loss on the sale of education loans .........................................
Net gain on the sale of other real estate owned ............................
Gain on branch divestitures ..........................................................
Loan-related fees ..........................................................................
Income from bank-owned life insurance .....................................
Legal settlements ..........................................................................
Other.............................................................................................
Total non-interest income ........................................................ $
2016 compared to 2015
Year Ended December 31,
2015
2016
2014
2,892 $
960
340
51
-
49
-
439
552
-
920
6,203 $
2,960 $
2,296
292
-
-
162
-
442
564
184
900
7,800 $
2,975
6,640
292
-
(13 )
209
607
440
650
2,127
993
14,920
For the year ended December 31, 2016, non-interest income decreased $1.6 million, or 20.5%, to $6.2 million compared to
$7.8 million for the same period of 2015. Non-interest income levels in 2016 were largely impacted by a reduction in net
gains on the sale of securities of $1.3 million, or 58.2%, from $2.3 million during 2015 to $1.0 million during 2016. In
addition, FNCB received non-recurring income from legal settlements of $0.2 million in 2015.
Also affecting non-interest income were reductions in net gains on the sale of OREO and deposit services charges, which
were partially mitigated by increases in gains from loan sales. The sale of OREO properties generated net gains of $49
thousand in 2016, a decrease of $113 thousand, or 69.8%, from $162 thousand in 2015. Deposit service charges also declined
slightly by $68 thousand, or 2.3%. Partially offsetting these decreases was an increase in net gains on the sale of mortgage
loans held for sale of $48 thousand, or 16.4%, from $292 thousand in 2015 to $340 thousand in 2016. Also during 2016,
FNCB realized a net gain of $51 thousand on the sale of the guaranteed principal balance of three loans that were guaranteed
by the Small Business Administration (“SBA”). Loan-related fees, income from bank-owned life insurance policies, and
other income remained steady comparing 2016 and 2015.
2015 compared to 2014
For the year ended December 31, 2015, non-interest income decreased $7.1 million, or 47.7%, to $7.8 million compared to
$14.9 million for the same period of 2014. Non-interest income levels in 2015 were impacted by a reduction in net gains on
the sale of securities and non-recurring income in 2014. Net gains on the sale of securities totaled $2.3 million in 2015, a
decrease of $4.3 million from $6.6 million in 2014. In addition, non-recurring income in 2014 included monies received from
the settlement of judgments filed pursuant to a large commercial credit relationship and a net gain recorded on the divestiture
of FNCB’s Monroe County branch offices.
32
The sale of OREO properties generated net gains of $162 thousand in 2015, a decrease of $47 thousand, or 22.5%, from $209
thousand in 2014. Deposit service charges, loan-related fees and net gains on the sale of mortgage loans held for sale all were
relatively flat comparing 2015 and 2014. Income from bank-owned life insurance policies and other income decreased $86
thousand and $93 thousand, respectively, in 2015 as compared to 2014.
Non-Interest Expense
The following table presents the major components of non-interest expense for the years ended December 31, 2016, 2015
and 2014:
Components of Non-Interest Expense
(in thousands)
Salaries and employee benefits ........................................ $
Occupancy expense ..........................................................
Equipment expense ..........................................................
Advertising expense .........................................................
Data processing expense ..................................................
Regulatory assessments ....................................................
Bank shares tax ................................................................
Expense of other real estate ..............................................
Legal expense ...................................................................
Professional fees ...............................................................
Insurance expense ............................................................
Legal settlements ..............................................................
Other losses ......................................................................
Other operating expenses .................................................
Total non-interest expense ............................................ $
2016 compared to 2015
2016
Year Ended December 31,
2015
2014
14,320 $
1,777
1,732
554
1,997
729
836
409
362
961
516
-
277
3,075
27,545 $
13,810 $
2,284
1,657
483
1,976
950
705
400
437
1,014
659
777
281
3,031
28,464 $
13,111
2,088
1,471
470
2,088
1,801
522
2,569
1,799
1,567
951
-
2,279
2,853
33,569
Non-interest expense levels continued to improve during 2016. Non-interest expense totaled $27.5 million in 2016, a decrease
of $0.9 million, or 3.2%, from $28.5 million in 2015. The decrease resulted primarily from reductions in legal settlements,
occupancy expense, regulatory assessments, insurance expenses, legal expenses, and professional fees. Partially offsetting
these decreases were increases in salaries and employee benefits, bank shares tax, equipment expense and advertising
expenses.
Long-term facilities planning and the relocation of one of the Bank’s corporate offices contributed to occupancy expense
reductions of $0.5 million, or 22.2%, to $1.8 million in 2016 as compared to $2.3 million in 2015. Specifically, FNCB
experienced decreases in rent expense, maintenance expenses, snow removal costs, and utilities expenses.
Included in regulatory assessments expense are FDIC insurance assessments and semi-annual assessments imposed by the
Bank’s primary regulator. FNCB experienced a $0.2 million, or 23.3%, reduction in regulatory assessment expense
comparing 2016 and 2015. The decrease largely reflected the Bank’s conversion from a national charter to a state charter and
continued improvement in the Bank’s risk profile. The change in charter resulted in a reduction in semi-annual regulatory
assessments of $150 thousand, or 53.4%, to $131 thousand in 2016 from $281 thousand in 2015. In addition, during the
second quarter of 2015, FNCB was notified by the FDIC that the Bank’s risk category for FDIC assessments had improved
to a risk category I, the lowest risk category from risk category II based upon the results of its most recent regulatory
examination. The change in risk categories became effective on February 1, 2015, and as a result the Bank’s initial base
assessment rate for deposit insurance decreased from 0.14 basis points to a range of 0.05 – 0.09 basis points. FNCB was able
to realize a full-year of lower assessment rates in 2016, which resulted in a $71 thousand, or 10.6%, reduction in FDIC
assessments comparing 2016 and 2015. Moreover, FNCB’s improved risk profile contributed to a $0.1 million, or 21.7%,
reduction in insurance expenses.
Legal and professional fee expenses continued to decline throughout 2016 as outstanding litigation was resolved and reliance
on outside consulting firms declined. Legal expenses declined $75 thousand, or 17.2%, as compared to 2015, while
professional fees decreased $53 thousand, or 5.2%.
33
FNCB experienced an increase in salaries and employee benefit costs of $0.5 million, or 3.7%, to $14.3 million in 2016 as
compared to $13.8 million in 2015. Despite a reduction in the number of full-time equivalent employees to 236 at December
31, 2016 from 250 at December 31, 2015, total salary expense increased $245 thousand, or 2.1%, due to annual merit
increases and severance-related costs. Payroll taxes and employee benefits increased $265 thousand, or 11.1%, which largely
reflected higher health insurance premiums and an increase in the state unemployment compensation rate.
On October 1, 2015, the Bank executed a Supplemental Executive Retirement Plan (“SERP”) for a select group of
management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of The
Employee Retirement Income Security Act of 1974. The general provisions of the SERP provide for annual year-end
contributions, performance contingent contributions and discretionary contributions. The SERP contributions are unfunded
for federal tax purposes and constitute an unsecured promise by the Bank to pay benefits in the future. Participants in the
SERP shall have the status of general unsecured creditors of the Bank. Annual accrued unfunded contributions included in
salaries and employee benefits expense totaled $147 thousand in 2016 and $130 thousand in 2015.
2015 compared to 2014
Non-interest expense totaled $28.5 million in 2015, a decrease of $5.1 million, or 15.2%, from $33.6 million in 2014. The
decrease resulted primarily from reductions in expenses of other real estate owned, regulatory assessments, legal expenses,
professional fees, insurance expense and other losses. Partially offsetting these decreases were increases in salaries and
employee benefits, occupancy and equipment expense and legal settlements.
Expenses of other real estate owned amounted to $400 thousand in 2015, a decrease of $2.2 million from $2.6 million in
2014. Valuation adjustments to the values of OREO properties decreased $2.0 million comparing 2016 and 2015, which was
the primary factor leading to the decrease in OREO-related expenses.
As mentioned above, the Bank’s risk category for FDIC insurance assessments improved to risk category I, the lowest
category, effective February 1, 2015. The change in assessment rate contributed to a decrease in regulatory assessments of
$851 thousand, or 47.3%, to $1.0 million in 2015 from $1.8 million in 2014.
Legal expense decreased significantly due to the resolution of longstanding regulatory matters and litigation. Legal expense
was $437 thousand in 2015, a decrease of $1.4 million, or 75.7%, from $1.8 million in 2014. Similarly, professional fees in
2015 decreased $553 thousand, or 35.3%, to $1.0 million in 2014 from $1.6 million in 2015, as FNCB continues to monitor
and decrease its reliance on third-party consultants.
Due to its improved risk profile, in mid-2016, FNCB was able to renew its professional liability, fidelity bond and errors and
omissions insurance policies at lower rates. As a result, insurance expense decreased $292 thousand, or 30.7%, to $0.7 million
in 2015 from $1.0 million in 2014.
Other losses sustained by FNCB were $281 thousand in 2015, a decrease of $2.0 million compared to $2.3 million. For 2015,
other losses predominantly included losses related to debit card transactions and minor losses sustained during the core
conversion. Other losses in 2014 included penalties assessed by two regulatory agencies totaling $1.7 million.
Salaries and employee benefits expense increased $699 thousand, or 5.3%, to $13.8 million in 2015 from $13.1 million in
2014. Total salary expense increased $540 thousand, or 5.0%, due to increases in stock-based compensation and employee
incentive compensation. Payroll taxes and employee benefits increased $158 thousand, or 7.1%, which was due primarily
due to increases in state unemployment taxes and costs associated with the establishment of SERP of $130 thousand in 2015.
There were no SERP-related expenses in 2014. At December 31, 2015, the number of full-time equivalent employees was
250 as compared to 237 at December 31, 2014.
Increases in rent expense, real estate taxes and building maintenance costs resulted in a $0.2 million, or 9.3%, increase in
occupancy costs, while higher equipment maintenance caused a $0.2 million, or 12.6% increase in equipment expense.
FNCB successfully completed a conversion of its core operating system in the fourth quarter of 2015. FNCB expects only a
minor increase in equipment expense, specifically related to depreciation and maintenance costs, as a result of this conversion.
34
Provision for Income Taxes
FNCB recorded income tax expense of $1.7 million in 2016, as compared to an income tax benefit of $27.8 million in 2015.
The income tax benefit recorded in 2015 resulted primarily from the reversal of the valuation allowance for FNCB’s deferred
tax assets. FNCB recorded income tax expense of $0.3 million in 2014, which was related entirely to alternative minimum
tax.
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. If management determines based on available evidence, both positive and negative,
that it is more likely than not that some portion or all of the deferred tax asset will not be realized in future periods, a valuation
allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s
estimates and judgments used in their evaluation of both positive and negative evidence.
In evaluating available evidence, management considers, among other factors, historical financial performance, expectation
of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods,
experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of
reversals of temporary differences. In assessing the need for a valuation allowance, management carefully weighs both
positive and negative evidence currently available. Based on the analysis of all available positive and negative evidence,
management determined that negative evidence existed at December 31, 2014 that outweighed any positive evidence that
existed at that time. Accordingly, management had established a valuation allowance equal to 100.0% of net deferred tax
assets, excluding deferred tax assets or liabilities related to unrealized holding gains and losses on available-for-sale
securities.
Management performed an evaluation of FNCB’s deferred tax assets at December 31, 2015 and determined that based on its
consistent methodology the negative evidence that was present at December 31, 2014 no longer existed. FNCB’s core
earnings had normalized and it was now in a cumulative three-year income position, which management deemed to be
positive evidence. In addition, management believed that FNCB’s projected future earnings were sufficient to be able to
utilize its available net operating loss (NOL) carryforwards prior to their expiration.
This analysis supported the reversal of the valuation allowance established for deferred tax assets at December 31, 2015
except for the valuation allowance established for charitable contribution carryforwards. At December 31, 2015, FNCB had
$1.0 million in contribution carryforwards available. Unlike the expiration period for net operating loss carryforwards
(generally 20 years) and AMT Credit carryovers (indefinite), the expiration of an excess charitable contribution carryover
occurs after the 5th succeeding tax year for which a charitable contribution is made. Management did not believe that enough
positive evidence existed to support the utilization of charitable contribution carryforwards in entirety before expiration at
December 31, 2015. Accordingly, management believed a valuation allowance in the amount of $355 thousand was
appropriate strictly in the case of the excess charitable contribution carryover deferred tax asset at December 31, 2015.
At December 31, 2016, management performed an evaluation of FNCB’s deferred tax assets taking into consideration both
positive and negative evidence that existed as of that date. In addition, management assessed the continued need for a
valuation allowance related to its contribution carryovers. Management anticipates that, based on its current tax provision,
FNCB will have generated enough taxable income in 2016 to utilize $353 thousand of the $1.0 million in available charitable
contribution carryforwards. At December 31, 2016, management believes that FNCB will be able to generate future taxable
income sufficient to utilize its deferred tax assets including the remaining contribution carryforwards in full prior to their
expiration in 2020. In addition, management believes that future taxable income will be sufficient to utilize deferred tax
assets. FNCB’s core earnings in 2016 were strong and its projected future core earnings will continue to support the
recognition of the deferred tax assets based on future growth projections. Accordingly, management concluded that no
valuation allowance was required at December 31, 2016.
FNCB uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. The Trump Administration
and the U.S. Congress are in the process of evaluating possible tax changes which may include a reduction in the U.S.
corporate income tax rates. There is no specific proposal currently pending. If corporate tax rates were reduced, management
expects FNCB would be required to record an initial charge against earnings to lower the carrying amount of its net deferred
tax asset, and then, going forward, would record lower tax provisions on an ongoing basis. There is no specific proposal
currently pending. Management cannot assess the effect a change in the corporate tax rate would have on FNCB’s operating
results or financial position at the present time.
35
FINANCIAL CONDITION
Total assets were $1.2 billion at December 31, 2016, an increase of $104.8 million, or 9.6%, from $1.1 billion, at
December 31, 2015. The balance sheet growth reflected an increase in total deposits of $193.6 million, or 23.6%, to $1.0
billion at December 31, 2016 from $0.8 billion at the end of 2015. The deposit growth was primarily used to pay down FHLB
advances of $77.3 million, and fund an increase in available-for-sale securities of $18.9 million. In addition, as previously
mentioned, FNCB repaid all previously deferred accrued interest on the Notes in the amount of $10.8 million, as well as
accelerated a $4.0 million principal payment due on the Notes September 1, 2017 to December 1, 2016.
FNCB’s capital position improved during 2016, demonstrated by an increase in total shareholders’ equity of $4.0 million, or
4.6%. Net income of $6.3 million, partially offset by dividends declared in 2016 of $1.5 million and a $1.5 million increase
in the accumulated other comprehensive loss due to depreciation in the fair value of FNCB’s available-for-sale securities
portfolio, accounted for the majority of the capital improvement. Dividends declared and paid by FNCB on its common
shares totaled $0.09 per share during 2016, which represented 23.6% of net income. On January 25, 2017, the Board of
Directors of FNCB declared a $0.03 per share dividend for the first quarter of 2017, payable on March 15, 2017 to
shareholders of record on March 1, 2017.
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. Management classifies investment securities as either held-to-maturity or
available-for-sale at the time of purchase based on its 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 December 31, 2016 and 2015, all
securities were classified as available-for-sale. 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 and tax planning strategies. Securities with limited marketability and/or
restrictions, such as FHLB of Pittsburgh stock, are carried at cost.
At December 31, 2016, FNCB’s investment portfolio was comprised principally of fixed-rate securities issued by U.S.
government or U.S. government-sponsored agencies, which include residential 1-4 family and multi-family mortgage-backed
securities, residential and commercial CMOs and single-maturity bonds, and fixed-rate taxable obligations of state and
political subdivisions. Except for U.S. government and government-sponsored agencies, there were no securities of any
individual issuer that exceeded 10.0% of shareholders’ equity as of December 31, 2016.
Because of the predominantly fixed-rate nature of the portfolio, FNCB’s debt securities are inherently subject to interest rate
risk, defined as the risk that an investment’s value will change due to a change in interest rates, in the spread between two
rates and in the shape of the yield curve. A security’s value is usually affected inversely by changes in rates. U.S. Treasury
rates, which fell to near-historical lows mid-2016 following the United Kingdom’s referendum to exit the European Union,
rebounded after the U.S. presidential election due to expectations of a more expansionary fiscal policy. The 2-year treasury
rate, which was 1.06% at December 31, 2015, fell 48 basis points to 0.58% at June 30, 2016 and then rose 61 basis points to
1.19% at December 31, 2016. Similarly, the 10-year treasury rate, which decreased 71 basis points from 2.18% at December
31, 2015 to 1.47% at June 30, 2016, rebounded 98 basis points to 2.45% at December 31, 2016. The change in interest rates
resulted in an aggregate $2.3 million decrease in the fair value of FNCB’s available-for-sale securities portfolio. FNCB
reported a net unrealized holding loss of $1.8 million, net of income taxes of $796 thousand, at December 31, 2016, compared
to an unrealized holding loss of $238 thousand, net of income taxes of $123 thousand, at December 31, 2015. Any additional
increases in interest rates could result in further depreciation in the fair value of FNCB’s securities portfolio and capital
position.
36
The following table presents the carrying value of securities, all of which were classified as available-for-sale and carried at
fair value at December 31, 2016, 2015 and 2014:
Composition of the Investment Portfolio
(in thousands)
Available-for-sale
Obligations of U.S. government agencies .......................................... $
Obligations of state and political subdivisions ...................................
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential ...........................
Collateralized mortgage obligations - commercial .........................
Mortgage-backed securities ............................................................
Corporate debt securities ....................................................................
Negotiable certificates of deposit .......................................................
Equity securities .................................................................................
Total available-for-sale securities ...................................................... $
2016
December 31,
2015
2014
12,188 $
117,873
18,084
99,350
20,576
453
3,216
936
272,676 $
44,043 $
75,407
22,269
89,423
18,098
423
3,162
948
253,773 $
29,276
24,509
26,231
61,256
74,098
420
2,232
967
218,989
Management actions with respect to the investment portfolio during 2016 reflected ongoing tax planning strategies which
focused on the generation of taxable income in order to utilize $50.4 million in available NOL carryforwards. In addition,
management’s investment strategies in 2016 took into consideration market opportunities that were presented due to changes
in market conditions and addressed FNCB’s ongoing liquidity needs.
Changing market conditions throughout 2016 allowed management to sell lower-yielding securities of U.S. government
agencies and reinvest the proceeds from the sales, as well as normal monthly cash flows from the portfolio, into higher-
yielding taxable obligations of state and political subdivisions and multi-family mortgage-backed securities and CMOs of
U.S. government/government-sponsored agencies. During 2016, FNCB sold eight of its available-for-sale securities, all of
which were single-maturity obligations of U.S. government agencies. The securities sold had an aggregate amortized cost of
$31.6 million and a weighted-average yield of 1.90%. Gross proceeds received totaled $32.6 million, with net gains of $1.0
million realized upon the sales and included in non-interest income.
Securities purchased during the year ended December 31, 2016 totaled $60.3 million, including $45.6 million in obligations
of state and political subdivisions, $11.5 million in commercial CMOs of U.S. government-sponsored agencies, and $3.2
million of multi-family mortgage-backed securities of U.S. government-sponsored agencies, with weighted-average yields
of 2.53%, 2.35% and 2.36%, respectively.
The following table presents the maturities of available-for-sale securities, based on carrying value at December 31, 2016,
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 states and political subdivisions are
presented on a tax-equivalent basis using an effective tax rate of 34.0%. Because residential and commercial collateralized
mortgage obligations and residential mortgage-backed securities are not due at a single maturity date, they are not included
in the maturity categories in the following summary.
37
Maturity Distribution of the Investment Portfolio
December 31, 2016
Collateralized
Mortgage
Obligations and
Within
One
Year
> 1-5
Years
Over Mortgage-
6-10
Years
10
Years
Backed
Securities
No
Fixed
Maturity
Total
(dollars in thousands)
Available-for-sale
Obligations of U.S. government
agencies ................................................ $
Yield .......................................................
Obligations of state and political
subdivisions .........................................
Yield .......................................................
U.S. government/government-sponsored
agencies:
Collateralized mortgage obligations –
residential .........................................
Yield ...................................................
Collateralized mortgage obligations –
commercial .......................................
Yield ...................................................
Mortgage-backed securities ................
Yield ...................................................
Corporate debt securities .........................
Yield .......................................................
Negotiable certificates of deposit ............
Yield .......................................................
Equity securities ......................................
Yield .......................................................
Total securities available-for-sale ...... $
Weighted yield ....................................
OTTI Evaluation
- $ 4,743 $ 7,445 $
2.29%
2.01%
- $
- $
- $ 12,188
2.18%
- 21,939 90,772 5,162
5.00%
2.43%
2.73%
-
- 117,873
2.77%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
249 2,967
2.09%
1.45%
-
-
453
1.51%
-
-
-
-
249 $ 29,649 $ 98,217 $ 5,615 $
4.72%
1.45%
2.33%
2.70%
18,084
2.63 %
99,350
2.25 %
20,576
2.61 %
-
-
-
138,010 $
2.35 %
- 18,084
2.63%
- 99,350
2.25%
- 20,576
-
2.61%
453
1.51%
-
3,216
2.04%
936
3.46%
936
3.46%
936 $ 272,676
3.46%
2.53%
There was no OTTI recognized during the years ended December 31, 2016, 2015 and 2014. For additional information
regarding management’s evaluation of securities for OTTI, see Note 4, “Securities” of the notes to consolidated financial
statements included in Item 8, “Financial Statement and Supplementary Data” to this Annual Report on Form 10-K.
Investments in FHLB of Pittsburgh and Federal Reserve Bank of Philadelphia (“FRB”) stock have limited marketability and
are carried at cost. FNCB’s investment in FHLB of Pittsburgh stock totaled $3.3 million and $6.3 million at December 31,
2016 and 2015, respectively. During the year ended December 31, 2016, as part of its conversion to a state charter, the Bank
canceled its membership with the FRB, and as a result, the entire balance of FRB stock totaling $1.3 million was redeemed.
FRB stock of $1.3 million is included in other assets in the consolidated statements of financial condition at December 31,
2015. Management noted no indicators of impairment for the FHLB of Pittsburgh stock at December 31, 2016.
Loans
FNCB experienced moderate demand for its retail lending products; however, payoffs related to several large commercial
lending relationships almost entirely outpaced originations, resulting in a modest $0.6 million, or 0.1%, increase in total loans
to $731.8 million at December 31, 2016 from $731.2 million at December 31, 2015. The most prominent growth was
exhibited in the residential real estate lending category, which was driven by a $7.5 million, or 21.4%, increase in demand
for FNCB’s proprietary “WOW” mortgage product, a non-saleable mortgage with maturity terms of 7.5 to 14.5 years. This
product offers customers an attractive fixed interest rate, low closing costs and a guaranteed 30-day close.
Historically, commercial lending activities have represented a significant portion of FNCB’s loan portfolio. Commercial
lending includes commercial and industrial loans, commercial real estate loans and construction, land acquisition and
development loans, and represented 56.8% and 58.2% of total loans at December 31, 2016 and December 31, 2015,
respectively.
38
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 and
home equity lines of credit (“HELOCs”), decreased by $3.6 million, or 0.8%, to $430.1 million at December 31, 2016 from
$433.7 million at December 31, 2015. The majority of the decrease was concentrated in the commercial sector, as several
large commercial real estate loans were paid off during 2016. Real estate secured loans represented 58.8% of total gross loans
at December 31, 2016 and 59.3% at December 31, 2015.
Commercial and industrial loans increased $3.9 million, or 2.6%, during the year to $153.8 million at December 31, 2016
from $149.8 million at December 31, 2015. Commercial and industrial loans consist primarily of equipment loans, working
capital financing, automobile floor plans, revolving lines of credit and loans secured by cash and marketable securities. Loans
secured by commercial real estate decreased $1.4 million, or 0.6%, to $243.8 million at December 31, 2016 from $245.2
million at December 31, 2015. Commercial real estate loans include long-term commercial mortgage financing and are
primarily secured by first or second lien mortgages. Construction, land acquisition and development loans decreased $12.5
million, or 40.5%, during the year to $18.4 million at December 31, 2016, from $30.9 million at December 31, 2015, as
several large projects reached completion and converted to permanent financing.
Residential real estate loans totaled $144.3 million at December 31, 2016, an increase of $13.6 million, or 10.4%, from $130.7
million at December 31, 2015. The components of residential real estate loans include fixed-rate and variable-rate mortgage
loans. HELOCs are not included in this category but are included in consumer loans. FNCB primarily underwrites fixed-rate
purchase and refinance of residential mortgage loans for sale in the secondary market to reduce interest rate risk and provide
funding for additional loans. During 2016, management continued a campaign to promote FNCB’s “WOW” residential
mortgage product. FNCB continued to experience favorable demand in 2016 for its “WOW” mortgages, which increased
$7.5 million, or 21.4%, to $42.5 million at December 31, 2016 from $35.0 million at December 31, 2015 and accounted for
the majority of the growth in residential real estate loans.
Consumer loans totaled $127.8 million at December 31, 2016, a decrease of $0.7 million, or 0.5%, from $128.5 million at
December 31, 2015. Loans to state and municipal governments decreased $2.4 million, or 5.2%, to $43.7 million at December
31, 2016 from $46.1 million at December 31, 2015.
The following table presents loans receivable, net by major category at December 31, for each of the last five years:
Loan Portfolio Detail
(in thousands)
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 costs .........................................
Allowance for loan and lease losses .....................
Loans, net ...................................................... $
2015
2016
144,260 $ 130,696 $
245,198
243,830
30,843
18,357
149,826
153,758
128,533
127,844
46,056
43,709
731,152
731,758
(98)
(48)
2,662
2,569
(8,790)
(8,419)
725,860 $ 724,926 $
December 31,
2014
122,832 $
233,473
18,835
132,057
122,092
40,205
669,494
(98)
871
(11,520)
658,747 $
2013
114,925 $
218,524
24,382
127,021
118,645
39,875
643,372
(143)
668
(14,017)
629,880 $
2012
90,228
221,591
32,502
109,693
109,783
33,978
597,775
(103)
260
(18,536)
579,396
39
The following table presents the maturity distribution and interest rate information of the loan portfolio by major category as
of December 31, 2016:
Maturity Distribution of the Loan Portfolio
December 31, 2016
(in thousands)
Residential real estate ................................................................... $
Commercial real estate .................................................................
Construction, land acquisition and development ..........................
Commercial and industrial ...........................................................
Consumer .....................................................................................
State and political subdivisions ....................................................
Total ...................................................................................... $
Within
One
Year
One to Five
Years
Over Five
1,365 $
27,703
9,111
90,319
6,597
4,780
139,875 $
6,574 $
30,171
1,470
42,975
71,369
7,868
160,427 $
Years
136,321 $
185,956
7,776
20,464
49,878
31,061
431,456 $
Total
144,260
243,830
18,357
153,758
127,844
43,709
731,758
Loans with predetermined interest rates ....................................... $
Loans with floating rates ..............................................................
Total ...................................................................................... $
27,145 $
112,730
139,875 $
117,412 $
43,015
160,427 $
171,690 $
259,766
431,456 $
316,247
415,511
731,758
Under industry regulations, a concentration is considered to exist when there are amounts loaned to a multiple number of
borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions.
Typically industry guidelines require disclosure of concentrations of loans exceeding 10.0% of total loans outstanding. FNCB
had no such concentrations at December 31, 2016, 2015 and 2014. In addition to industry guidelines, FNCB’s internal policy
considers a concentration to exist in its loan portfolio if an aggregate loan balance outstanding to borrowers within a specific
industry exceeds 25.0% of capital. However, management regularly reviews loans by all industry categories to determine if
a potential concentration exists.
The following table presents loans by industry, the percentage to gross loans and indicates concentrations greater than 25.0%
of capital at December 31, 2016, 2015 and 2014:
Loan Concentrations
2016
December 31,
2015
2014
(dollars in thousands)
Retail space/shopping centers* ..... $
Automobile dealers* .....................
1-4 family residential investment
properties* ..................................
Office complexes/units ..................
Physicians ......................................
Colleges and Universities ..............
Land subdivision ...........................
Amount
% of Gross
Loans
Amount
% of Gross
Loans
Amount
% of Gross
Loans
38,573
31,989
24,413
14,257
15,058
14,021
11,975
5.27% $
4.37%
35,292
34,594
4.83% $
4.73%
33,140
24,194
3.34%
1.95%
2.06%
1.92%
1.64%
18,957
18,487
10,677
18,540
12,673
2.59%
2.53%
1.46%
2.54%
1.73%
12,764
17,249
13,636
16,680
15,220
4.95 %
3.61 %
1.91 %
2.58 %
2.04 %
2.49 %
2.27 %
* Concentration exceeds 25.0% of capital at December 31, 2016
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 loan officers, the loan review function, and the Loan
Quality and the ALLL management committees, as well as oversight from 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.
40
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 Loan Quality Committee, which consists of key members of
management, finance, legal, retail and credit administration, meets 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 considered 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, 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 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
borrower are classified as TDRs and are considered to be impaired. 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 residential 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.
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 Loan Quality 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 reduce loan balances by working with customers to develop
strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means.
Real estate values in FNCB’s market area have appeared to stabilize; however, throughout 2016, employment conditions
within FNCB’s market area have weakened. The unemployment rate for the Scranton/Wilkes-Barre/Hazleton Pennsylvania
metropolitan area increased to 6.0% for December 2016 from 5.2% for December 2015. Further weakening of economic and
employment conditions could result in real estate devaluations which could negatively impact asset quality and, accordingly,
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, a factor of 10% is
generally utilized to estimate costs to sell, 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
considered to be zero.
41
The following table presents information about non-performing assets and accruing TDRs as of December 31 for each of the
last five years:
Non-performing Assets and Accruing TDRs
(dollars in thousands)
Non-accrual loans, including non-accrual TDRs . $
Loans past due 90 days or more and still
accruing .............................................................
Total non-performing loans ..................................
Other real estate owned ........................................
Other non-performing assets ................................
Total non-performing assets ............................. $
Accruing TDRs .................................................... $
Non-performing loans as a percentage of gross
2016
2015
December 31,
2014
2013
2012
2,234 $
3,788 $
5,522 $
6,356 $
9,652
-
2,234
2,048
2,160
6,442 $
-
3,788
3,154
-
6,942 $
-
5,522
2,255
-
7,777 $
19
6,375
4,246
-
10,621 $
57
9,709
3,983
-
13,692
4,176 $
4,982 $
5,282 $
3,995 $
7,517
loans ...................................................................
0.31%
0.52%
0.82%
0.99%
1.62%
Work-out efforts focused on the effective management and resolution of problem credits and the prompt and aggressive
disposition of foreclosed properties continue to lead to improvement in FNCB’s asset quality in 2016. Total non-performing
assets decreased $0.5 million, or 7.2%, to $6.4 million at December 31, 2016 from $6.9 million at December 31, 2015.
FNCB’s ratio of non-performing loans to total gross loans improved to 0.31% at December 31, 2016 from 0.52% at December
31, 2015, as management continued to reduce the balance of non-accrual loans. Moreover, FNCB’s ratio of non-performing
assets as a percentage of shareholders’ equity decreased to 7.1% at December 31, 2016 from 8.1% at December 31, 2015.
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 potential collection-related issues.
Other non-performing assets include a classified account receivable secured by an evergreen letter of credit in the amount of
$1.9 million and $260 thousand of foreclosed equipment. The $1.9 million account receivable, which arose 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, has been included in other assets since 2009. The project was stalled due to a decline
in real estate values in this area following the Financial Crisis of 2008. The agreement provides for payment to FNCB as real
estate building lots are sold. Management monitors this project closely. To date, no lots have been sold, however economic
development in this market area has recently improved and construction activity related to this project by the developer has
increased. Management conservatively classified this asset as substandard strictly due to length of holding time and does not
anticipate that FNCB will incur any loss related to this receivable.
TDRs at December 31, 2016 and 2015 were $4.3 million and $5.8 million, respectively. Accruing and non-accruing TDRs
were $4.2 million and $0.1 million, respectively at December 31, 2016 and $5.0 million and $0.8 million, respectively at
December 31, 2015. There were 4 loans modified as TDRs during the year ended December 31, 2016, with an aggregate
post-modification outstanding balance of $0.3 million. New modifications during the year ended December 31, 2016 included
extension of terms and capitalization of real estate taxes for two residential real estate loans and extension of terms for two
commercial and industrial loans.
The average balance of impaired loans was $6.9 million and $11.1 million for the years ended December 31, 2016 and 2015,
respectively. FNCB recognized $202 thousand and $258 thousand of interest income on impaired loans for the years ended
December 31, 2016 and 2015, respectively.
42
The following table presents the changes in non-performing loans for the years ended December 31, 2016 and 2015. Loan
foreclosures represent recorded investment at time of foreclosure not including the effect of any guarantees:
Changes in Non-performing Loans
(in thousands)
Balance, January 1 ........................................................................................................... $
Loans newly placed on non-accrual .................................................................................
Change in loans past due 90 days or more and still accruing ...........................................
Loan foreclosures .............................................................................................................
Loans returned to performing status .................................................................................
Loans charged-off ............................................................................................................
Loan payments received ...................................................................................................
Balance, December 31...................................................................................................... $
Year ended December 31,
2016
2015
3,788 $
3,853
-
(1,177 )
(147 )
(2,556 )
(1,527 )
2,234 $
5,522
5,636
-
(3,697)
(135)
(2,576)
(962)
3,788
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 approximated $0.2 million for the year ended December 31, 2016 and
$0.4 million for the year ended December 31, 2015.
In addition to the non-performing loans identified in the table above, management regularly monitors potential problem loans
which consist of substandard and accruing loans. FNCB experienced substantial improvement in the volume of these loans
which decreased $8.1 million, or 56.3% to $6.3 million at December 31, 2016 from $14.4 million at December 31, 2015.
The following table presents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at December
31, 2016, 2015 and 2014:
Loan Delinquencies and Non-accrual Loans
Accruing:
30- 59 days .....................................................................
60- 89 days .....................................................................
90+ days ........................................................................
Non-accrual .......................................................................
Total delinquencies ....................................................
2016
December 31,
2015
2014
0.37%
0.13%
0.00%
0.31%
0.81%
0.18%
0.14%
0.00%
0.52%
0.84%
0.30%
0.09%
0.00%
0.82%
1.21%
Total delinquencies as a percent of gross loans improved slightly in 2016, as non-accrual loans decreased $1.6 million, or
41.0%, to $2.2 million at December 31, 2016 from $3.8 million at December 31, 2015, primarily due to decreases in non-
accrual residential and commercial real estate loans.
In its evaluation of the ALLL, management considers a variety of qualitative factors including changes in the volume and
severity of delinquencies. Management also considers the economic conditions in FNCB’s market area and continues to
notice some weakness. As previously mentioned, the unemployment rate for the Scranton-Wilkes-Barre-Hazleton
metropolitan area, FNCB’s predominant market area, weakened to a seasonally adjusted rate of 6.0% for December 2016
from 5.2% for December 2015. In addition, unemployment in this market continues to rank among the highest as compared
to Pennsylvania’s 21 metropolitan areas and lags behind the unemployment rate for the entire Commonwealth, which also
weakened to 5.6% for December 2016 from 4.7% for December 2015. FNCB tries to mitigate these factors by emphasizing
strict underwriting standards.
43
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 its analysis, 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. With regard to 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 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 consists of both specific and general components. At December 31, 2016, the ALLL that 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 $302 thousand, or 3.6%, of the total ALLL. A general allocation of $8.1 million was calculated for loans
analyzed collectively under ASC 450 “Contingencies” (“ASC 450”), which represented 96.4% of the total ALLL of $8.4
million. The ratio of the ALLL to total loans at December 31, 2016 and December 31, 2015 was 1.15% and 1.20%,
respectively, based on total loans of $731.8 million and $731.2 million, respectively.
The ALLL equaled $8.4 million at December 31, 2016, a decrease of $0.4 million from $8.8 million at December 31, 2015.
FNCB recorded net charge offs of $1.5 million in 2016, which was the primary factor leading to the provision for loan and
lease losses of $1.2 million for the year ended December 31, 2016.
The following table presents an allocation of the ALLL by major loan category and the percentage of loans in each category
to total loans at December 31, for each of the last five years:
44
Allocation of the ALLL
2016
2015
Percentage
of Loans
in
Each
Category
to Total
Percentage
of Loans
in
Each
Category
to Total
December 31,
2014
Percentage
of Loans
in
Each
Category
to Total
2013
2012
Percentage
of Loans
in
Each
Category
to Total
Percentage
of Loans
in
Each
Category
to Total
Allowance Loans
Allowance Loans
Allowance Loans
Allowance Loans
Allowance Loans
(dollars in
thousands)
Residential real
estate .................... $
1,171
19.72% $
1,333
17.87% $
1,772
18.35% $
2,287
17.86% $
1,764
15.09%
Commercial real
estate ...................
3,297
33.32%
3,346
33.54%
4,663
34.87%
6,017
33.97%
8,062
37.07%
Construction, land
acquisition and
development .......
Commercial and
industrial ..............
Consumer ................
State and political
subdivisions .........
Unallocated .............
Total ........................ $
268
2.51%
853
4.22%
665
2.81%
924
3.79%
2,162
5.44%
1,736
1,457
490
-
8,419
21.01%
17.47%
1,205
1,494
20.49%
17.58%
2,104
1,673
19.72%
18.24%
2,321
1,789
19.74%
18.44%
4,167
1,708
18.35%
18.37%
5.97%
0.00%
100.00% $
485
74
8,790
6.30%
0.00%
598
45
100.00% $ 11,520
6.01%
0.00%
679
-
100.00% $ 14,017
6.20%
0.00%
673
-
100.00% $ 18,536
5.68%
0.00%
100.00%
The following table presents a reconciliation of the ALLL by loan category for each of the last five years:
Reconciliation of the ALLL
(in thousands)
Balance, January 1, .............................................. $
Charge-offs:
Residential real estate ....................................
Commercial real estate ..................................
Construction, land acquisition and
development ..............................................
Commercial and industrial ............................
Consumer ......................................................
State and political subdivision ......................
Total charge-offs ..................................................
Recoveries of charged-off loans:
Residential real estate ....................................
Commercial real estate ..................................
Construction, land acquisition and
development ..............................................
Commercial and industrial ............................
Consumer ......................................................
State and political subdivision ......................
Total recoveries ....................................................
Net charge-offs (recoveries) ................................
Provision (credit) for loan and lease losses ..........
Balance, December 31.......................................... $
Ratios:
Net charge-offs (recoveries) as a percentage of
2016
For the Year Ended December 31,
2013
2014
2015
2012
8,790 $
11,520 $
14,017
$
18,536
$
20,834
153
398
139
912
-
1,107
960
-
2,618
688
180
716
-
2,635
4
6
58
307
9
507
568
-
1,094
1,524
1,153
8,419 $
-
400
485
-
1,250
1,385
(1,345)
8,790 $
204
-
45
217
922
-
1,388
90
362
3,538
262
508
-
4,760
(3,372)
(5,869)
11,520
$
664
65
179
341
655
-
1,904
343
879
130
1,853
450
-
3,655
(1,751 )
(6,270 )
14,017
$
683
3,298
258
3,389
673
-
8,301
35
1,035
265
265
338
-
1,938
6,363
4,065
18,536
average loans ....................................................
0.21%
0.20%
(0.51)%
(0.28 )%
0.97%
Allowance for loan and lease losses as a percent
of gross loans outstanding at period end ...........
1.15%
1.20%
1.72%
2.18 %
3.10%
45
Other Real Estate Owned
At December 31, 2016, there were nine properties with an aggregate carrying value of $2.0 million in OREO, compared to
eleven properties with an aggregate balance of $3.2 million at December 31, 2015. During the year ended December 31,
2016, there were two properties with an aggregate carrying value of $950 thousand foreclosed upon. During the year ended
December 31, 2015, FNCB foreclosed on four properties with a carrying value of $1.7 million.
Included in OREO were three properties previously held in bank premises and equipment that were transferred to OREO due
to a change in their intended use. The properties include two commercial lots previously held for future expansion and a
former branch office located in Stroudsburg, Pennsylvania. The aggregate carrying value of these properties was $1.2 million
and represented 59.8% of OREO at December 31, 2016.
During the year ended December 31, 2016, there were three sales and one partial sale of properties with an aggregate carrying
value of $1.9 million. Net gains realized on the sale of these properties was $49 thousand, which is included in non-interest
income. There were seven sales and one partial sale of properties with an aggregate carrying value of $0.6 million during the
twelve months ended December 31, 2015, with net gains realized on the sales of $162 thousand, which is included in non-
interest income for the year ended December 31, 2015.
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. Further deterioration in the real estate market could result in additional losses on these
properties. FNCB incurred valuation adjustments of $169 thousand and $208 thousand for the years ended December 31,
2016 and 2015, respectively.
The following table presents the activity in OREO for each of the three years ended December 31, 2016, 2015 and 2014:
Activity in OREO
(in thousands)
Balance, Janauary 1 ............................................................................ $
Real estate foreclosures ......................................................................
Bank premises transferred to OREO ..................................................
Valuation adjustments ........................................................................
Carrying value of OREO sold ............................................................
Balance, December 31........................................................................ $
For the Years Ended December 31,
2015
2016
2014
3,154 $
950
-
(169)
(1,887)
2,048 $
2,255 $
1,717
-
(208 )
(610 )
3,154 $
4,246
13
1,749
(2,200 )
(1,553 )
2,255
The following table presents a distribution of OREO at December 31 for the past five years:
Distribution of OREO
(in thousands)
Land / lots ............................................................. $
Commercial real estate .........................................
Residential real estate ...........................................
Total other real estate owned ............................ $
2016
2015
December 31,
2014
641 $
1,380
27
2,048 $
785 $
2,342
27
3,154 $
1,287 $
941
27
2,255 $
2013
2012
3,549 $
647
50
4,246 $
2,711
1,245
27
3,983
The expenses related to maintaining OREO, including the subsequent write-downs of the properties related to declines in
value since foreclosure, net of any income received, amounted to $0.4 million, $0.4 million, and $2.6 million for the years
ended December 31, 2016, 2015, and 2014, respectively.
46
Deposits
Total deposits increased $193.6 million, or 23.6%, to $1.0 billion at December 31, 2016 from $0.8 billion at the end of 2015.
Non-interest-bearing demand deposits increased $19.2 million, or 12.4%, while interest-bearing deposits decreased $174.4
million, or 26.2%. The increase in non-interest bearing demand deposits primarily reflected growth in business checking
deposits, while the increase in interest-bearing deposits was primarily due to growth in municipal deposit accounts of $206.5
million, to $303.9 million at December 31, 2016 from $97.4 million at December 31, 2015 and savings accounts of $10.4
million to $102.2 million at December 31, 2016 from $91.8 million at December 31, 2015. Partially offsetting these increases
were a decreases in money market accounts of $37.2 to $129.7 million at December 31, 2016 from $166.9 million at
December 31, 2015 and other time deposits of $24.6 million to $112.0 million at December 31, 2016 from $136.6 million at
December 31, 2015. The 18.0% decrease in other time deposits included $17.5 million in brokered time deposits that matured.
The 212.0% increase in municipal deposits reflected the attainment of new relationships through a newly organized
government banking department, coupled with short-term funds from the sale of a municipal utility deposited in the fourth
quarter of 2016. FNCB expects a portion of those funds to run out during the first quarter of 2017. The 22.3% decrease in
money market accounts resulted primarily from the withdrawal of funds from one large commercial depositor that
participated in FNCB’s ICS program through the Promontory Interfinancial Network
Non-interest-bearing demand deposits averaged $8.8 million, or 6.3%, higher at $148.7 million in 2016 as compared to
$139.9 million in 2015. Interest-bearing deposits averaged $741.1 million in 2016, an increase of $66.5 million, or 9.9%,
compared to $674.6 million in 2015. The increase was concentrated in interest-bearing demand deposits, which increased
$76.7 million, or 21.4%, to $435.1 million in 2016 from $358.4 million in 2015 due primarily to growth in municipal deposit
accounts. In addition, average savings deposits increased $5.6 million, or 6.1% comparing 2016 and 2015. Partially offsetting
these increases was a decrease of $15.8 million, or 7.0%, in average total time deposits. FNCB’s deposit funding costs
decreased 2 basis points to 0.37% in 2016 from 0.39% in 2015, which was driven primarily by a 5-basis point decrease in
the average rate paid for time deposits, as higher-costing time deposits matured. Rates on interest-bearing demand deposits
and savings deposits increased by 2 basis points and 3 basis points, respectively.
Management recognizes the importance of deposit growth as its primary funding source for loan products and is in the process
of developing new products and strategies focused on growing commercial and consumer demand deposit balances and
municipal deposit relationships in 2017.
The average amount of, and the rate paid on, the major classifications of deposits for the past three years are summarized in
the following table:
Deposit Distribution
(dollars in thousands)
Interest-bearing deposits:
2016
For the Year Ended December 31,
2015
2014
Amount Rate
Amount Rate
Amount Rate
Demand...................................... $
Savings ......................................
Time ..........................................
Total interest-bearing deposits ......
435,092
97,188
208,783
741,063
0.22 % $
0.10 %
0.80 %
0.37 %
358,442
91,603
224,538
674,583
0.19% $ 320,780
88,678
0.07%
268,360
0.85%
677,818
0.39%
0.14 %
0.06 %
0.99 %
0.47 %
Non-interest-bearing deposits .......
148,746
139,945
134,132
Total deposits ................................ $
889,809
$
814,528
$ 811,950
47
The following table presents the maturity distribution of time deposits of $100,000 or more at December 31, 2016 and 2015:
Maturity Distribution of Time Deposits $100,000 or More
(in thousands)
3 months or less ................................................................................................................ $
Over 3 through 6 months ..................................................................................................
Over 6 through 12 months ................................................................................................
Over 12 months ................................................................................................................
Total .............................................................................................................................. $
December 31,
2016
2015
27,461 $
7,511
18,805
25,938
79,715 $
26,773
16,186
19,185
14,053
76,197
Borrowings
Short-term borrowings generally represent overnight borrowing transactions through the FHLB of Pittsburgh, which provide
for short-term funding requirements of FNCB and mature within one business day of the transaction. Short-term borrowings
may also include federal funds purchased and borrowings through the Federal Reserve Discount Window, which are
considered to be a contingency source of funding. Other than testing its availability for contingency funding planning
purposes, FNCB did not purchase any federal funds or borrow from the Federal Reserve Discount Window during the years
ended December 31, 2016, 2015 and 2014. FNCB did not have any overnight advances outstanding with the FHLB of
Pittsburgh at December 31, 2016. Overnight advances outstanding at December 31, 2015 were $60.5 million.
Long-term debt is comprised of FHLB of Pittsburgh term advances, subordinated debentures and junior subordinated
debentures and totaled $78.8 million at December 31, 2016, a decrease of $20.8 million, or 20.8%, from $99.6 million at
December 31, 2015. The decrease was related to a $16.8 million decrease in advances through the FHLB of Pittsburgh,
coupled with a $4.0 million reduction in the Notes. FHLB of Pittsburgh advances are collateralized under a blanket pledge
agreement, and FNCB is also required to purchase FHLB of Pittsburgh stock based upon the amount of advances outstanding.
As a result of the decrease in term and overnight advances, the FHLB of Pittsburgh stock required to be held by FNCB was
$3.3 million at December 31, 2016, a decrease of $3.0 million from $6.3 million at December 31, 2015. At December 31,
2016, FNCB’s maximum borrowing capacity with the FHLB of Pittsburgh was $298.1 million, of which had $164.0 million
was available for borrowing purposes.
On September 1, 2009, FNCB offered only to accredited investors up to $25.0 million principal amount of unsecured
subordinated debentures due September 1, 2019 (the “Notes”). Prior to July 1, 2015, the Notes had a fixed interest rate of 9%
per annum. Payments of interest are payable to registered holders of the Notes (the “Noteholders”) quarterly on the first of
every third month, subject to the right of FNCB to defer such payment. On June 30, 2015, pursuant to approval from all of
the Noteholders and the Reserve Bank, FNCB amended the original terms of the Notes to reduce the interest rate payable
from 9.00% to 4.50% effective July 1, 2015 and to accelerate a partial repayment of principal amount under the Notes.
Pursuant to the approved amendment, on June 30, 2015, FNCB repaid 44% of the original principal amount, or $11.0 million,
of the Notes outstanding to the holders on June 30, 2015, with the remaining $14.0 million in principal to be repaid as follows:
(a) 16% of the original principal amount, or $4.0 million, payable on September 1, 2017; (b) 20% of the original principal
amounts, or $5.0 million, payable on September 1, 2018; and (c) the final 20% of the original principal amount, or $5.0
million, payable on September 1, 2019, the maturity date of the Notes. On October 28, 2016, the Board of Directors of FNCB
approved the acceleration of a $4.0 million partial repayment of principal on the Notes. The $4.0 million principal repayment,
which was due and payable on September 1, 2017, was paid to Noteholders on December 1, 2016. The principal balance
outstanding for these Notes was $10.0 million at December 31, 2016 and $14.0 million at December 31, 2015.
While FNCB was under the Written Agreement, principal and interest payments on the Notes required written non-objection
from the Reserve Bank. Pursuant to the Written Agreement, FNCB had been deferring the quarterly interest payments on the
Notes beginning December 1, 2010 and ending on June 1, 2015. Beginning with the September 1, 2015 payment, FNCB
resumed the regularly scheduled quarterly interest payments and since that date has continued to make the scheduled interest
payments going forward. Additionally, on January 27, 2016, the Board of Directors authorized payment on March 1, 2016
of all interest that FNCB had previously been deferring on the Notes. The aggregate payment, totaling $11.0 million, included
all deferred interest and interest due and payable on March 1, 2016. The accrued and unpaid interest associated with the Notes
amounted to $39 thousand and $10.9 million at December 31, 2016 and 2015, respectively.
FNCB also had $10.3 million of junior subordinated debentures outstanding at December 31, 2016 and 2015. The interest
rate on these debentures resets quarterly at a spread of 1.67% above the current 3-month LIBOR rate. The average interest
rate paid on the junior subordinated debentures in 2016 was 2.35%, compared to 1.99% in 2015.
48
Average borrowed funds decreased $4.7 million, or 4.4%, to $103.2 million in 2016 from $108.0 million in 2015. The average
rate paid for long-term debt decreased 59 basis points to 1.42% in 2016 from 2.01% in 2015. The decrease in rate on the
long-term debt was due to the reduction in the interest rate on the Notes, coupled with a decrease in the cost of FHLB funding.
FNCB participates in the FHLB of Pittsburgh’s “Community Lending Program,” which offers match funding for loans
originated for qualified community and economic development projects at very competitive rates that are typically 15 to 25
basis points below the FHLB’s regular published rates. Of the $58.5 million in FHLB term advances outstanding at December
31, 2016, $37.6 million were advances under this program at a weighted-average cost of 0.63% and maturity terms of nine
months.
The maximum amount of total borrowings outstanding at any month end during the years ended December 31, 2016 and
2015 were $145.1 million and $160.1 million, respectively. For further discussion of FNCB’s borrowings, see Note 8-
“Borrowed Funds” in the Notes to the consolidated financial statements included in Item 8 hereof to this Annual Report on
Form 10-K.
Liquidity
The term liquidity refers to the ability to generate sufficient amounts of cash to meet its 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
certificate of deposit maturity structure and retention. FNCB has liquidity and contingent funding policies in place that are
designed with controls 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 stress tests
on its liquidity levels and develops strategies to ensure adequate liquidity at all times.
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 are FNCB’s most liquid assets. At December
31, 2016, cash and cash equivalents totaled $112.4 million, an increase of $91.4 million from $21.1 million at December 31,
2015, as net cash inflows from financing and operating activities exceeded net cash outflows for investing activities.
Financing activities provided $111.3 million in net cash, which resulted primarily from a $193.6 million net increase in
deposits and $0.4 million in proceeds from the issuance of common shares. Partially offsetting these inflows was net
repayments of FHLB of Pittsburgh advances of $77.3 million and a $4.0 million principal reduction on the Notes.
Additionally, FNCB’s operating activities provided $0.4 million in net cash in 2016. Net income, adjusted for the effects of
non-cash transactions including, among others, depreciation and amortization, provision for loan and lease losses and change
in deferred taxes, is the primary source of funds from operations.
Cash outlays for investing activities used $20.3 million of cash and cash equivalents during the year ended December 31,
2016, which was due largely to purchases of available-for sale securities, net of proceeds received from sales, maturities,
calls and principal reductions of $21.5 million. In addition, net increases in loans to customers used $5.7 million of cash and
cash equivalents. Partially offsetting these cash outflows from investing activities were cash inflows from the redemption of
FHLB of Pittsburgh stock and FRB stock of $3.0 million and $1.4 million, respectively, and proceeds from the sale of SBA
guaranteed loans of $1.3 million and OREO of $1.9 million.
Management believes that FNCB’s liquidity position is sufficient to meet its cash flow needs as of December 31, 2016. FNCB
generally utilizes core deposits as its primary source of liquidity. Core deposits include non-interest-bearing and interest-
bearing demand deposits, savings deposits and other time deposits, net of brokered deposits and deposits generated through
the Promontory Interfinancial Network, which include time deposits issued under CDARs program and money market and
NOW accounts issued through the ICS program. Participating in the Promontory Interfinancial Network programs allows
FNCB to service and attract potential high-balance deposits customers who want the security of full-FDIC insurance but want
to maintain a local deposit relationship. Core deposits averaged $715.8 million for the year ended December 31, 2016, an
increase of $35.0 million, or 5.1%, compared to $680.8 million for the year ended December 31, 2015. The increase in core
deposits primarily reflected growth in interest-bearing demand, net of deposits issued through the ICS program, of $39.6
million, non-interest-bearing demand deposits of $8.8 million and savings deposits of $5.6 million. Partially offsetting these
increases was a decrease in other time deposits, net of brokered deposits and CDARs certificates, of $19.0 million. In addition
to core deposits, FNCB currently utilizes brokered certificates of deposit, funding through the Promontory Financial Network
and advances through the FHLB of Pittsburgh as alternative sources of liquidity. At December 31, 2016, FNCB had available
borrowing capacity with the FHLB of Pittsburgh of $164.0 million.
49
Capital
A strong capital base is essential to the continued growth and profitability of FNCB and is therefore a management priority.
Management’s principal capital planning goals are to provide an adequate return to shareholders while retaining a sufficient
base from which to provide for future growth, while at the same time complying with all regulatory standards. As more fully
described in Note 14, “Regulatory Matters” to the notes to the consolidated financial statements included in Item 8 of this
Annual Report on Form 10-K, regulatory authorities have prescribed specified minimum capital ratios as guidelines for
determining capital adequacy to help assure the safety and soundness of financial institutions.
The following schedules present information regarding FNCB’s and the Bank’s risk-based capital at December 31, 2016 and
2015, and selected other capital ratios:
Minimum
Required
For
Capital
Adequacy
Purposes
Company
Bank
(dollars in thousands)
December 31, 2016
Total capital (to risk-weighted
Amount Ratio Amount Ratio Ratio
Minimum
Required
For
Capital
Adequacy
Purposes
with
Conservation
Buffer
Ratio
Minimum
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Regulations*
Ratio
assets) ......................................... $
96,827 12.06% $ 102,786 12.81%
8.00%
8.625%
10.00%
Tier I capital (to risk-weighted
assets) .........................................
82,159 10.23%
94,118 11.73%
6.00%
6.625%
8.00%
Tier I common equity (to risk-
weighted assets) .........................
80,049 9.97%
94,118 11.73%
4.50%
5.125%
6.50%
Tier I capital (to average assets) ...
82,159 7.53%
94,118 8.63%
4.00%
4.000%
5.00%
Total risk-weighted assets ............ 803,026
802,610
Total average assets ...................... 1,090,665
1,090,550
50
Minimum
Required
For
Capital
Adequacy
Purposes
Company
Bank
(dollars in thousands)
December 31, 2015
Total capital (to risk-weighted
Amount Ratio Amount Ratio Ratio
Minimum
Required
For
Capital
Adequacy
Purposes
with
Conservation
Buffer
Ratio
Minimum
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Regulations*
Ratio
assets) ........................................... $
93,835 11.79% $ 110,039 13.83%
8.00%
N/A
10.00%
Tier I capital (to risk-weighted
assets) ...........................................
74,945 9.42% 100,949 12.69%
6.00%
N/A
8.00%
Tier I common equity (to risk-
weighted assets) ...........................
74,945 9.42% 100,949 12.69%
4.50%
N/A
6.50%
Tier I capital (to average assets) .....
74,945 7.27% 100,949 9.79%
4.00%
N/A
5.00%
Total risk-weighted assets .............. 795,887
795,490
Total average assets ........................ 1,031,426
1,030,828
* Applies to the Bank only
FNCB’s total regulatory capital increased $3.0 million to $96.8 million at December 31, 2016 from $93.8 million at December
31, 2015. FNCB’s and the Bank’s risk-based capital ratios exceeded the minimum regulatory capital ratios required for
adequately capitalized institutions. Based on the most recent notification from its primary regulators, the Bank was
categorized as well capitalized at December 31, 2016 and 2015. There are no conditions or events since this notification the
management believes have changed this category.
As of December 31, 2016, FNCB had 33,354,155 common shares available for future sale or share dividends. The number
of shareholders of record at December 31, 2016 was 1,740. Quarterly market highs and lows, dividends paid and known
market makers are highlighted in Part I, Item 5 of this report. Refer to Note 14, “Regulatory Matters,” to the Notes to
consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further discussion of our capital
requirements and dividend limitations.
Additionally, FNCB has available 20,000,000 authorized shares of preferred stock. There were no preferred shares issued
and outstanding at December 31, 2016 and 2015.
FNCB had a Dividend Reinvestment and Optional Cash Purchase Plan (“DRP”), which permitted participants to
automatically reinvest cash dividends on all of their shares and to make voluntary cash contributions under the terms of the
plan at a discounted price. While under the Written Agreement, FNCB was prohibited from paying dividends without the
prior approval of its primary regulator. Accordingly, the DRP was suspended in 2011. On April 27, 2016, the Board of
Directors approved the reinstatement of the DRP, which became effective on June 1, 2016. Common shares issued under the
DRP in 2016 totaled 78,752. There were no common shares issued under the DRP in 2015 and 2014.
As previously mentioned, the Bank and FNCB were released from all regulatory enforcement actions and are no longer
subject to the provisions of the Consent Order and Written Agreement, respectively. During 2016, FNCB declared and paid
dividends of $0.09 per share. There were no dividends declared or paid during 2015. Subsequent to December 31, 2016, on
January 25, 2017, FNCB declared a $0.03 per common share dividend payable on March 15, 2017 to shareholders of record
on March 1, 2017.
51
Off-Balance Sheet Arrangements
In the normal 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 year ended December 31, 2016, 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. For a further discussion of FNCB’s off-
balance sheet arrangements, refer to Note 12, “Commitments, Contingencies, and Concentrations” to the notes to the
consolidated financial statements included in Item 8 hereof to this Annual Report on Form 10-K.
The following table presents off-balance financial instruments whose contractual amounts represent credit risk at December
31, 2016 and 2015. All of the off-balance sheet financial instruments outstanding at December 31, 2016 expire within one
year of their respective contract dates.
Off-Balance Sheet Commitments
(in thousands)
Commitments to extend credit ................................................................................ $
Standby letters of credit ...........................................................................................
December 31,
2016
2015
150,111 $
21,220
170,465
22,092
In order to provide for probable losses inherent in these instruments, FNCB recorded reserves for unfunded commitments of
$249 thousand and $300 thousand at December 31, 2016 and 2015, respectively, which were included in other liabilities in
the consolidated statements of financial condition.
FNCB’s Finance unit proactively monitors the level of unused commitments against the available sources of liquidity from
its investment portfolio, from deposit gathering activities as well as available unused borrowing capacity from the FHLB and
the Federal Reserve. The Finance unit reports the results of its liquidity monitoring regularly to FNCB’s Asset/Liability
Management Committee, the Rate and Liquidity Committee, the Senior Management Committee and the Board of Directors.
Contractual Obligations
The following table details FNCB’s contractual obligations as of December 31, 2016. Payments due by period in the
following table are based on final maturity dates without consideration of early redemption.
Maturities of Contractual Obligations
(in thousands)
Federal Home Loan Bank advances- term ........... $
Subordinated debentures ......................................
Junior subordinated debt ......................................
Operating lease obligations ..................................
Total contractual cash obligations ........................ $
Contractual Payments Due by Period
Less Than
one Year
1-3 Years
3-5 Years
More Than
5 Years
Total
58,537 $
10,000
10,310
1,382
80,229 $
47,553 $
-
-
560
48,113 $
10,984 $
10,000
-
411
21,395 $
- $
-
-
205
205 $
-
-
10,310
206
10,516
52
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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.
Asset and Liability Management
FNCB manages these objectives through its Asset and Liability Management Committee (“ALCO”) and its Rate and
Liquidity and Investment Committees, which consist of certain members of management and certain members of the finance
department. Members of the committees meet regularly to develop balance sheet strategies affecting the future level of net
interest income, liquidity and capital. 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.
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, our 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 has been enhanced to require periodic 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 December 31, 2016 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
53
● cash flows are reinvested into similar instruments 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 December 31, 2016 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 ....................................
(2.0)%
(10.0)%
(4.3)%
(20.0)%
(5.7)%
(5.0)%
Economic value at risk:
Percent change in economic
value of equity ........................
(4.7)%
(20.0)%
(8.5)%
(35.0)%
(9.9)%
(10.0)%
Under the model, FNCB’s net interest income and economic value of equity is expected to decrease 2.0% and 4.7%,
respectively, under a 200 basis point interest rate shock. In comparison, model results at December 31, 2015 indicated net
interest income was expected to decrease 3.2% and 11.2% given +200 and +400 basis point rate shocks. Model results at
December 31, 2016 indicate that FNCB is short-term liability sensitive and long-term asset sensitive, which reflect the
increase in interest-bearing demand deposits and public funds. FNCB experiences decreases in net interest income over all
interest rate scenarios as asset cash flows are being replaced/repriced into lower assumed yields, while further funding cost
reductions are limited. However, this trend improved as compared to model results at December 31, 2015 as a result of
improved replacement rates on assets due to steepening in the yield curve. 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: 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.
As previously mentioned, as part of its ongoing monitoring, ALCO requires periodic 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 December 31, 2016 with tax-equivalent net interest income that was projected for the
same three-month period. The variance between actual and projected tax-equivalent net interest income for the three-month
period ended December 31, 2016 was $115 thousand or 1.4%. Although the variance was deemed immaterial, ALCO
performs a rate/volume analysis between actual and projected results in order to continue to improve the accuracy of its
simulation models.
54
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors of
FNCB Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition of FNCB Bancorp, Inc. and Subsidiaries
(the “Company”) as of December 31, 2016 and 2015 and the related consolidated statements of income, comprehensive
income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31,
2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of FNCB Bancorp, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 10, 2017 expressed an unqualified opinion.
/s/Baker Tilly Virchow Krause, LLP
Wilkes-Barre, Pennsylvania
March 10, 2017
55
FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
Assets
Cash and cash equivalents:
December 31, December 31,
2016
2015
Cash and due from banks .............................................................................................. $
Interest-bearing deposits in other banks .......................................................................
Total cash and cash equivalents .............................................................................
Securities available for sale, at fair value .........................................................................
Stock in Federal Home Loan Bank of Pittsburgh, at cost ................................................
Loans held for sale ...........................................................................................................
Loans, net of allowance for loan and lease losses of $8,419 and $8,790 .........................
Bank premises and equipment, net ...................................................................................
Accrued interest receivable ..............................................................................................
Bank-owned life insurance ...............................................................................................
Other real estate owned ....................................................................................................
Net deferred tax assets......................................................................................................
Other assets ......................................................................................................................
Total assets........................................................................................................ $
20,562 $
91,883
112,445
272,676
3,311
596
725,860
10,784
2,757
29,933
2,048
26,990
7,975
1,195,375 $
Liabilities
Deposits:
Demand (non-interest-bearing) ..................................................................................... $
Interest-bearing .............................................................................................................
Total deposits ........................................................................................................
173,702 $
841,437
1,015,139
Borrowed funds:
Federal Home Loan Bank of Pittsburgh advances ........................................................
Subordinated debentures ...............................................................................................
Junior subordinated debentures ....................................................................................
Total borrowed funds ............................................................................................
Accrued interest payable ..................................................................................................
Other liabilities .................................................................................................................
Total liabilities .....................................................................................................
58,537
10,000
10,310
78,847
242
11,000
1,105,228
19,544
1,539
21,083
253,773
6,344
683
724,926
11,193
2,475
29,381
3,154
27,807
9,799
1,090,618
154,531
667,015
821,546
135,802
14,000
10,310
160,112
11,165
11,617
1,004,440
Shareholders' equity
Preferred shares ($1.25 par)
Authorized: 20,000,000 shares at December 31, 2016 and December 31, 2015
Issued and outstanding: 0 shares at December 31, 2016 and December 31, 2015 ........
-
-
Common shares ($1.25 par)
Authorized: 50,000,000 shares at December 31, 2016 and December 31, 2015
Issued and outstanding: 16,645,845 shares at December 31, 2016 and 16,514,245
shares at December 31, 2015 .......................................................................................
Additional paid-in capital .................................................................................................
Retained earnings .............................................................................................................
Accumulated other comprehensive loss ...........................................................................
Total shareholders' equity ..................................................................................
Total liabilities and shareholders’ equity ....................................................... $
20,807
62,593
8,531
(1,784 )
90,147
1,195,375 $
20,643
62,059
3,714
(238)
86,178
1,090,618
The accompanying notes to consolidated financial statements are an integral part of these statements.
56
FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except share data)
Interest income
Interest and fees on loans ................................................................................................ $
Interest and dividends on securities:
U.S. government agencies ......................................................................................
State and political subdivisions, tax-free ...............................................................
State and political subdivisions, taxable ................................................................
Other securities .......................................................................................................
Total interest and dividends on securities .....................................................
Interest on interest-bearing deposits in other banks ........................................................
Total interest income ..............................................................................
Interest expense
Interest on deposits ..........................................................................................................
Interest on borrowed funds:
Interest on Federal Home Loan Bank of Pittsburgh advances ..............................
Interest on subordinated debentures .......................................................................
Interest on junior subordinated debentures ...........................................................
Total interest on borrowed funds ..................................................................
Total interest expense .............................................................................
Net interest income before provision (credit) for loan and lease losses ...................
Provision (credit) for loan and lease losses .....................................................................
Net interest income after provision (credit) for loan and lease losses .....................
Non-interest income
Deposit service charges ...................................................................................................
Net gain on the sale of securities .....................................................................................
Net gain on the sale of mortgage loans held for sale ......................................................
Net gain on the sale of SBA guaranteed loans ................................................................
Net loss on the sale of education loans ...........................................................................
Net gain on the sale of other real estate owned ..............................................................
Gain on branch divestitures .............................................................................................
Loan-related fees .............................................................................................................
Income from bank-owned life insurance ........................................................................
Legal settlements .............................................................................................................
Other ................................................................................................................................
Total non-interest income .....................................................................
Non-interest expense
Salaries and employee benefits .......................................................................................
Occupancy expense .........................................................................................................
Equipment expense..........................................................................................................
Advertising expense ........................................................................................................
Data processing expense .................................................................................................
Regulatory assessments ...................................................................................................
Bank shares tax ................................................................................................................
Expense of other real estate owned .................................................................................
Legal expense ..................................................................................................................
Professional fees ..............................................................................................................
Insurance expenses ..........................................................................................................
Legal settlements .............................................................................................................
Other losses .....................................................................................................................
Other operating expenses ................................................................................................
Total non-interest expense .....................................................................
Income before income taxes .........................................................................................
Income tax expense (benefit) ..........................................................................................
Net income ..................................................................................................................... $
Earnings per share
Basic ....................................................................................................................... $
Diluted .................................................................................................................... $
Cash Dividends Declared Per Common Share
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
$
For the Year Ended December 31,
2015
2016
2014
28,223 $
26,672 $
3,557
46
2,574
315
6,492
33
34,748
4,036
109
905
433
5,483
46
32,201
2,730
2,631
595
625
247
1,467
4,197
30,551
1,153
29,398
2,892
960
340
51
-
49
-
439
552
-
920
6,203
14,320
1,777
1,732
554
1,997
729
836
409
362
961
516
-
277
3,075
27,545
8,056
1,747
6,309 $
0.38 $
0.38 $
0.09 $
514
1,450
206
2,170
4,801
27,400
(1,345 )
28,745
2,960
2,296
292
-
-
162
-
442
564
184
900
7,800
13,810
2,284
1,657
483
1,976
950
705
400
437
1,014
659
777
281
3,031
28,464
8,081
(27,759 )
35,840 $
2.17 $
2.17 $
- $
26,629
3,494
1,883
324
272
5,973
71
32,673
3,180
450
2,281
236
2,967
6,147
26,526
(5,869 )
32,395
2,975
6,640
292
-
(13 )
209
607
440
650
2,127
993
14,920
13,111
2,088
1,471
470
2,088
1,801
522
2,569
1,799
1,567
951
-
2,279
2,853
33,569
13,746
326
13,420
0.81
0.81
-
Basic .......................................................................................................................
Diluted ....................................................................................................................
16,571,262
16,572,695
16,499,622
16,499,622
16,472,660
16,472,871
The accompanying notes to consolidated financial statements are an integral part of these statements.
57
FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income ......................................................................................... $
Other comprehensive (loss) income:
Unrealized (losses) gains on securities available for sale ...............
Tax expense (benefit) .....................................................................
Net of tax amount ...........................................................................
Reclassification adjustment for gains included in net income ........
Tax expense ....................................................................................
Net of tax amount ...........................................................................
For the Year Ended December 31,
2015
2016
2014
6,309 $
35,840 $
13,420
(1,382)
470
(912)
(960)
326
(634)
211
(72 )
139
(2,296 )
781
(1,515 )
12,682
(4,312 )
8,370
(6,272 )
2,132
(4,140 )
Total other comprehensive (loss) income...........................................
(1,546)
(1,376 )
4,230
Comprehensive income ...................................................................... $
4,763 $
34,464 $
17,650
The accompanying notes to consolidated financial statements are an integral part of these statements.
58
FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2016, 2015 and 2014
Accumulated Accumulated
Number of
Common Common Paid-in Retained
Capital Earnings
Shares
Additional
Stock
(Deficit) /
Other
Total
Comprehensive Shareholders'
(Loss) Income
Equity
(in thousands, except share data)
Balances, December 31, 2013 .......... 16,471,569 $ 20,589 $
-
16
-
Net income for the year ................
Stock-based compensation ............
Restricted stock awards ................
Other comprehensive income, net
-
12,850
-
of tax of $2,180 ..........................
-
Balances, December 31, 2014 .......... 16,484,419 $ 20,605 $
-
17
Net income for the year ................
Stock-based compensation ............
Common shares issued under
-
13,300
-
61,627 $
-
61
93
-
61,781 $
-
52
(45,546 ) $
13,420
-
-
-
(32,126 ) $
35,840
-
long-term incentive
compensation plan ......................
Restricted stock awards ................
Other comprehensive loss, net of
16,526
-
21
-
(21)
247
-
-
tax of $709..................................
-
Balances, December 31, 2015 .......... 16,514,245 $ 20,643 $
-
Net income for the year ................
Cash dividends declared, $0.09
-
-
-
62,059 $
-
-
3,714 $
6,309
(3,092) $
-
-
-
4,230
1,138 $
-
-
-
-
(1,376)
(238) $
-
33,578
13,420
77
93
4,230
51,398
35,840
69
-
247
(1,376)
86,178
6,309
per share .....................................
-
-
-
(1,492 )
-
(1,492)
Common shares issued under
long-term incentive
compensation plan ......................
Restricted stock awards ................
Common shares issued through
dividend reinvestment / optional
cash purchase plan ......................
Other comprehensive loss, net of
52,848
-
66
-
(66)
265
78,752
98
335
-
-
-
-
-
-
-
265
433
tax of $796..................................
-
Balances, December 31, 2016 .......... 16,645,845 $ 20,807 $
-
-
62,593 $
-
8,531 $
(1,546)
(1,784) $
(1,546)
90,147
The accompanying notes to consolidated financial statements are an integral part of these statements.
59
FNCB BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities:
Net income ................................................................................................................................................. $
Adjustments to reconcile net income to net cash provided by operating activities:
Investment securities amortization, net ......................................................................................................
Equity in trust .............................................................................................................................................
Depreciation and amortization ...................................................................................................................
Valuation adjustment for loan servicing rights ..........................................................................................
Provision (credit) for loan and lease losses ................................................................................................
Valuation adjustment for off-balance sheet commitments ........................................................................
Stock-based compensation expense ...........................................................................................................
Gain on the sale of available-for-sale securities ........................................................................................
Gain on the sale of held-to-maturity securities ..........................................................................................
Gain on the sale of loans held for sale .......................................................................................................
Loss on the sale of education loans ............................................................................................................
Gain on branch divestitures ........................................................................................................................
Loss on the disposition of bank premises and equipment and other assets ...............................................
Gain on the sale of SBA guaranteed loans .................................................................................................
Net gain on the sale of other real estate owned ..........................................................................................
Valuation adjustment for other real estate owned ......................................................................................
Income from bank-owned life insurance ...................................................................................................
Proceeds from the sale of loans held for sale .............................................................................................
Funds used to originate loans held for sale ................................................................................................
Deferred income tax expense (benefit) ......................................................................................................
(Increase) decrease in accrued interest receivable .....................................................................................
Decrease in prepaid expenses and other assets ..........................................................................................
(Decrease) increase in accrued interest payable .........................................................................................
(Decrease) increase in accrued expenses and other liabilities ...................................................................
Total adjustments ........................................................................................................................................
Net cash provided by operating activities ..............................................................................................
Cash flows from investing activities:
Maturities, calls and principal payments of investment securities available for sale ................................
Proceeds from the sale of securities available for sale ...............................................................................
Proceeds from the sale of securities held to maturity ................................................................................
Purchases of securities available for sale ...................................................................................................
Redemption (purchase) of the stock of the Federal Home Loan Bank of Pittsburgh ................................
Redemption of Federal Reserve Bank stock ..............................................................................................
Net increase in loans to customers .............................................................................................................
Proceeds from the sale of SBA guaranteed loans ......................................................................................
Proceeds from the sale of education loans .................................................................................................
Proceeds from the sale of other real estate owned .....................................................................................
Purchases of bank premises and equipment ...............................................................................................
Proceeds from the sale of bank premises and equipment ..........................................................................
Net cash used in investing activities ........................................................................................................
Cash flows from financing activities:
Net increase (decrease) in deposits ............................................................................................................
Net (repayment of) proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight ..........
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term ..................................................
Repayment of Federal Home Loan Bank of Pittsburgh advances - term ..................................................
Principal reduction on subordinated debentures ........................................................................................
Proceeds from issuance of common shares ................................................................................................
Cash dividends paid ....................................................................................................................................
Net cash provided by (used in) financing activities ...............................................................................
Net increase (decrease) in cash and cash equivalents ...........................................................................
Cash and cash equivalents at beginning of year ....................................................................................
Cash and cash equivalents at end of year .............................................................................................. $
Supplemental cash flow information
Cash paid during the period for:
Interest ....................................................................................................................................................... $
Income taxes ..............................................................................................................................................
Other transactions:
Principal balance of loans transferred to other real estate owned ..............................................................
Government guarantee receivable on loans transferred to other real estate owned or other assets ..........
Transfer of bank premises and equipment to other real estate owned .......................................................
Change in deferred gain on sale of other real estate owned .......................................................................
For the Year Ended December 31,
2015
2014
2016
6,309 $
35,840 $
13,420
1,165
(7)
2,604
5
1,153
(51)
265
(960)
-
(340)
-
-
-
(51)
(49)
169
(552)
9,817
(9,390)
1,613
(282)
496
(10,923)
(558)
(5,876)
433
6,264
32,588
-
(60,302)
3,033
1,351
(5,656)
1,315
-
1,928
(861)
-
(20,340)
193,593
(60,500)
46,915
(63,680)
(4,000)
433
(1,492)
111,269
91,362
21,083
112,445 $
15,120 $
10
1,210
-
-
(8)
1,423
(6)
1,703
-
(1,345)
(117)
316
(2,296)
-
(292)
-
-
-
-
(162)
208
(564)
8,210
(7,998)
(27,684)
(400)
917
903
(4,195)
(31,379)
4,461
8,615
88,658
-
(133,269)
(3,541)
-
(68,665)
-
-
758
(1,419)
-
(108,863)
26,210
60,500
151,300
(137,192)
(11,000)
-
-
89,818
(14,584)
35,667
21,083 $
3,898 $
22
3,697
(1,980)
-
14
1,356
(6)
1,470
-
(5,869)
(94)
170
(6,272)
(368)
(292)
13
(607)
232
-
(209)
2,200
(650)
8,555
(8,046)
-
116
169
1,530
1,694
(4,908)
8,512
8,331
111,243
2,686
(123,380)
(657)
-
(25,321)
-
2,537
1,737
(1,217)
2,505
(21,536)
(88,936)
-
194,235
(160,164)
-
-
-
(54,865)
(67,889)
103,556
35,667
4,617
308
13
-
1,749
26
The accompanying notes to consolidated financial statements are an integral part of these statements.
60
Notes to Consolidated Financial Statements
Note 1. ORGANIZATION
On June 30, 2016, First National Community Bancorp, Inc., the parent company of First National Community Bank,
announced that following receipt of required regulatory approvals from the Pennsylvania Department of Banking and
Securities, First National Community Bank had completed a charter conversion from a national bank to a Pennsylvania state
bank and, as a result of the conversion, First National Community Bank changed its legal name to FNCB Bank. Both the
charter conversion and legal name change became effective June 30, 2016. On October 4, 2016, First National Community
Bancorp, Inc., the parent company of FNCB Bank, filed an amendment to its articles of incorporation to change its name,
effective October 17, 2016, to “FNCB Bancorp, Inc.” The Board of Directors has also amended its bylaws, effective October
17, 2016, to reflect the new name.
FNCB Bancorp, Inc. is a registered bank holding company under the Bank Holding Company Act of 1956 incorporated under
the laws of the Commonwealth of Pennsylvania in 1997. It is the parent company of FNCB Bank (the “Bank”) and the Bank’s
wholly owned subsidiaries FNCB Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB Realty Company II,
LLC. Unless the context otherwise requires, the term “FNCB” is used to refer to FNCB Bancorp, Inc., and its subsidiaries.
In certain circumstances, however, the term “FNCB” refers to FNCB Bancorp, Inc., itself.
The Bank provides customary banking services to individuals and businesses through its 19 banking locations located in
northeastern Pennsylvania.
On January 6, 2017, the Bank notified the Pennsylvania Department of Banking and Securities and FNCB’s federal banking
regulators of its intent to open a limited purpose office (“LPO”) in Allentown, Lehigh County, Pennsylvania. The
Pennsylvania Department of Banking and Securities issued a non-objection letter to the Bank on February 22, 2017 regarding
the establishment of the Allentown-based LPO.
FNCB Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB Realty Company II, LLC were formed to hold real
estate and/or operate businesses acquired in exchange for debt settlement or foreclosure.
In December 2006, First National Community Statutory Trust I (“Issuing Trust”), which is wholly owned by FNCB, was
formed under Delaware law to provide FNCB with an additional funding source through the issuance of pooled trust preferred
securities. FNCB has adopted Accounting Standards Codification (“ASC”) 810-10, Consolidation, for the Issuing Trust.
Accordingly, the Issuing Trust has not been consolidated with the accounts of FNCB, because FNCB is not the primary
beneficiary of the trust.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of FNCB include the accounts of FNCB Bancorp, Inc., the Bank, and the Bank’s
wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. The
accounting and reporting policies of FNCB conform to accounting principles generally accepted in the United States of
America (“GAAP”), Regulation S-X and general practices within the banking industry. Prior period amounts are reclassified
when necessary to conform to the current year’s presentation. Such reclassifications had no effect on FNCB’s financial
condition or results of operations.
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 the 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 these estimates. Material estimates that are particularly susceptible to change in the
near term are the allowance for loan and lease losses, securities’ valuation and impairment evaluation, the valuation of other
real estate owned, and income taxes.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include cash on hand and amounts due from banks.
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Securities
FNCB classifies investment securities as either held-to-maturity or available-for-sale at the time of purchase. Investment
securities that are classified as held-to-maturity are carried at amortized cost when management has the positive intent and
ability to hold them to maturity. Investment securities that are classified as available-for-sale are carried at fair value with
unrealized holding gains and losses recognized as a component of shareholders’ equity in accumulated other comprehensive
loss, net of tax. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to
yield using the interest method. Realized gains and losses on sales of investment securities are based on amortized cost using
the specific identification method on the trade date.
On a quarterly basis, management evaluates each of its investment securities classified as held-to-maturity or available-for-
sale in an unrealized loss position for other than temporary impairment (“OTTI”). An individual security is considered
impaired when its current fair value is less than its amortized cost basis. As part of the OTTI evaluation, management
considers the following factors in determining whether the security’s impairment is other than temporary:
the length of time and extent of the impairment;
the causes of the decline in fair value, such as credit deterioration, interest rate fluctuations, or market volatility;
adverse industry or geographic conditions;
●
●
●
● historical implied volatility;
● payment structure of the security and whether FNCB expects to receive all contractual cash flows;
●
●
●
failure of the issuer to make contractual interest or principal payments in the past;
changes in the security’s rating; and
recoveries or additional declines in the security’s fair value subsequent to the balance sheet date.
Based on current authoritative guidance, when a held-to-maturity or available-for-sale debt security is assessed for OTTI,
management must first consider (a) whether management intends to sell the security and (b) whether it is more likely than
not that FNCB will be required to sell the security prior to recovery of its amortized cost basis. If one of these circumstances
applies to a security, an OTTI loss is recognized in the statement of income equal to the full amount of the decline in fair
value below amortized cost. If neither of these circumstances applies to a security, but FNCB does not expect to recover the
entire amortized cost basis, an OTTI loss has occurred that must be separated into two categories: (a) the amount related to
credit loss and (b) the amount related to other factors (such as market risk). In assessing the level of OTTI attributable to
credit loss, management compares the present value of cash flows expected to be collected with the amortized cost basis of
the security. The portion of the total OTTI related to credit loss is identified as the amount of principal cash flows not expected
to be received over the remaining term of the security as estimated based on cash flow projections discounted at the applicable
original yield of the security, and is recognized in earnings, while the amount related to other factors is recognized in other
comprehensive income. The total OTTI loss is presented in the statement of income less the portion recognized in other
comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced
to reflect the portion of the total impairment related to credit loss.
For equity securities, FNCB evaluates whether or not the unrealized loss is expected to be recovered based on evidence to
support a realizable value equal to or greater than the amortized cost basis. If it is probable that the amortized cost basis will
not be recovered, taking into consideration the estimated recovery period and ability of FNCB to hold the security until
recovery, the entire difference between the security’s cost basis and its fair value is recognized in earnings at the balance
sheet date.
Investments in the Federal Reserve Bank and Federal Home Loan Bank stock have limited marketability, are carried at cost
and are evaluated for impairment based on FNCB’s determination of the ultimate recoverability of the par value of the stock.
During the year ended December 31, 2016, the Bank canceled its membership with the FRB, and as a result, the entire balance
of FRB stock totaling $1.3 million was redeemed. Federal Reserve Bank stock of $1.3 million is included in other assets in
the consolidated statements of financial condition at December 31, 2015.
Loans and Loan Origination Fees and Costs
Loans receivable, other than loans held for sale, are stated at the principal outstanding, net of unamortized loan fees and costs,
unearned income, partial charge-offs and the allowance for loan and lease losses. Interest income on all loans is recognized
using the effective interest method. Loan origination and commitment fees, as well as certain direct loan origination costs,
are deferred and the net amount is amortized as an adjustment of the related loan’s yield. FNCB generally amortizes these
amounts over the life of the related loan. Amortization of deferred loan fees or costs is discontinued when a loan is placed on
non-accrual status.
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Loans are placed on non-accrual status when a loan is specifically determined to be impaired or when management believes
that the collection of interest or principal is doubtful. This is generally when a default of interest or principal has existed for
90 days or more, unless the loan is fully 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, the
balance of any previously accrued but unpaid interest is reversed and charged against interest income. Any cash payments
subsequently received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts.
Any excess amount is 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
factors indicating reasonable doubt about the timely collection of payments no longer exist.
In accordance with federal regulations, prior to making, extending, renewing or advancing additional funds in excess of $250
thousand on a loan secured by real estate, FNCB requires an appraisal of the property by an independent, state-certified or
state-licensed appraiser (depending upon collateral type and loan amount) that is approved by the Board of Directors.
Appraisals are reviewed internally and, under certain circumstances, by an independent third party engaged by FNCB.
Generally, management obtains a new appraisal when a loan is deemed impaired. These appraisals may be more limited in
scope than those obtained at the initial underwriting of the loan.
Troubled Debt Restructurings
FNCB considers a loan to be a troubled debt restructuring (“TDR”) when it grants a concession to the borrower for legal or
economic reasons related to the borrower’s financial difficulties that it would not otherwise consider. Such concessions
granted generally involve a reduction of the stated interest rate, an extension of a loan’s maturity date, capitalization of real
estate taxes, or a permanent reduction of the recorded investment in the loan. A non-accrual TDR is returned to accrual status
when principal and interest payments under the modified terms are current, the TDR is performing under the modified terms
for six consecutive months and future payments are reasonably assured.
Loan Impairment
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 management’s analysis,
TDRs, loans rated substandard and on non-accrual status with an aggregate loan relationship greater than $100 thousand, and
loans that are identified as doubtful or loss, are considered impaired. Impaired loans are analyzed individually for impairment.
FNCB generally utilizes the fair value of collateral method for collateral dependent loans. A loan is considered to be collateral
dependent when repayment of the loan is expected to be provided through the liquidation of the collateral held. Generally,
for impaired loans that are secured by real estate, 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 current appraisal not be available at the time
of impairment analysis, other sources of valuation such as current letters of intent, broker price opinions or executed
agreements of sale may be used. For non-collateral dependent impaired loans, management measures impairment based on
the present value of expected future cash flows, discounted at the loan’s original effective interest rate.
Generally, all loans with balances of $100 thousand or less are considered within homogeneous pools and are not individually
evaluated for impairment. However, individual loans with balances of $100 thousand or less are individually evaluated for
impairment if that loan is part of a larger impaired loan relationship or the loan is a TDR.
Impaired loans, or portions thereof, are charged-off upon determination that all or a portion of the loan balance is uncollectible
and exceeds the fair value of the collateral. A loan is considered uncollectible when the borrower is delinquent with respect
to principal or interest repayment and it is unlikely that the borrower will have the ability to pay the debt in a timely manner,
collateral value is insufficient to cover the outstanding indebtedness and the guarantors (if applicable) do not provide adequate
support for the loan.
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 allowance for loan and lease losses (“ALLL”) on a quarterly basis. The ALLL is established through a
provision for loan and lease 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.
63
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 for 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 nonaccrual status above the $100 thousand loan relationship threshold and all loans considered TDRs are classified
as impaired. Based on its evaluation, management may establish an unallocated component for a respective loan segment (as
discussed below) when the actual historical loss experience for that loan segment results in an overall negative historical loss
factor.
When establishing the ALLL, management categorizes loans into the following loan segments that are based generally on
the nature of the collateral and basis of repayment. The risk characteristics of FNCB’s loan segments are as follows:
Construction, Land Acquisition and Development Loans - These loans consist of loans secured by real estate, with the purpose
of constructing one- to four-family homes, residential developments and various commercial properties including, shopping
centers, office complexes and single-purpose, owner-occupied structures. Additionally, loans in this category include loans
for land acquisition, secured by raw land. FNCB’s construction program offers either short-term, interest-only loans that
require the borrower to pay only interest during the construction phase with a balloon payment of the principal outstanding
at the end of the construction period or only interest during construction with a conversion to amortizing principal and interest
when the construction is complete. Loans for undeveloped real estate are subject to a loan-to-value ratio not to exceed 65%.
Construction loans are treated similarly to the developed real estate loans and are generally subject to an 80% loan to value
ratio based upon an “as-completed” appraised value. Construction loans generally yield a higher interest rate than other
mortgage loans but also carry more risk.
Commercial Real Estate Loans - These loans represent the largest portion of FNCB’s total loan portfolio and loans in this
portfolio generally carry larger loan balances. The commercial real estate mortgage loan portfolio consists of owner-occupied
and non-owner-occupied properties that are secured by a broad range of real estate, including but not limited to, office
complexes, shopping centers, hotels, warehouses, gas stations, convenience markets, residential care facilities, nursing care
facilities, restaurants and multifamily housing. FNCB offers commercial real estate loans at various rates and terms that
generally do not exceed 20 years. These types of loans are subject to specific loan-to-value guidelines prior to the time of
closing. The policy limits for developed real estate loans are subject to a maximum loan-to-value ratio of 80%. Commercial
mortgage loans must also meet specific criteria that include the capacity, capital, credit worthiness and cash flow of the
borrower and the project being financed. Potential borrower(s) and guarantor(s) are required to provide FNCB with historical
and current financial data. As part of the underwriting process for commercial real estate loans, management performs a
review of the cash flow analysis of the borrower(s), guarantor(s) and the project in addition to considering the borrower’s
expertise, credit history, net worth and the value of the underlying property.
Commercial and Industrial Loans - FNCB offers commercial loans at various rates and terms to businesses located in its
primary market area. The commercial loan portfolio includes revolving lines of credit, automobile floor plans, equipment
loans, vehicle loans, improvement loans and term loans. These loans generally carry a higher risk than commercial real estate
loans by the nature of the underlying collateral, which can be machinery and equipment, inventory, accounts receivable,
vehicles or marketable securities. Generally, a collateral lien is placed on the collateral supporting the loan. In order to reduce
the risk associated with these loans, management may attempt to secure real estate as collateral and obtain personal guarantees
of the borrower as deemed necessary.
State and Political Subdivision Loans - FNCB originates general obligation notes and tax anticipation loans to state and
political subdivisions, which are primarily municipalities in FNCB’s market area.
Residential Real Estate Loans - FNCB offers fixed- and variable-rate one- to four-family residential loans. Residential first
lien mortgages are generally subject to an 80% loan to value ratio based on the appraised value of the property. FNCB will
64
generally require the mortgagee to purchase Private Mortgage Insurance (“PMI”) if the amount of the loan exceeds the 80%
loan to value ratio. Residential mortgage loans are generally smaller in size and are considered homogeneous as they exhibit
similar characteristics. FNCB may sell loans and retain servicing when warranted by market conditions.
Consumer Loans - Include both secured and unsecured installment loans, personal lines of credit and overdraft protection
loans. FNCB is in the business of underwriting indirect auto loans which are originated through various auto dealers in
northeastern Pennsylvania and dealer floor plan loans. FNCB offers home equity loans and home equity lines of credit
(“HELOCs”) with a maximum combined loan-to-value ratio of 90% based on the appraised value of the property. Home
equity loans have fixed rates of interest and carry terms up to 15 years. HELOCs have adjustable interest rates and are based
upon the national prime interest rate. Consumer loans are generally smaller in size and exhibit homogeneous characteristics.
Off-Balance-Sheet Credit-Related Financial Instruments
FNCB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
need of its customers. These financial instruments include commitments to extend credit, unused portions of lines of credit,
including revolving HELOCs, and letters of credit. FNCB’s exposure to credit loss in the event of nonperformance by the
other party to the financial instrument is represented by the contractual notional amount of these instruments. FNCB uses the
same credit policies in making these commitments as it does for on-balance sheet instruments. In order to provide for probable
losses inherent in these instruments, FNCB records a reserve for unfunded commitments, included in other liabilities on the
consolidated statements of financial condition, with the offsetting expense recorded in other operating expenses in the
consolidated statements of income.
Mortgage Banking Activities and Loan Servicing
Mortgage loans originated and intended for sale are carried at the lower of aggregate cost or fair value determined on an
individual loan basis. Net unrealized losses are recorded as a valuation allowance and charged to earnings. Gains and losses
on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan
sold and include the value assigned to the rights to service the loan.
In addition, during the year ended December 31, 2016, FNCB sold the guaranteed principal balance of three loans that were
guaranteed by the Small Business Administration (“SBA”) totaling $1.3 million. FNCB retained the servicing rights on these
loans. There were no sales of SBA guaranteed loans during the years ended December 31, 2015 or 2014.
Servicing rights are recorded at fair value upon sale of the loan and reported in other assets on the consolidated statements of
financial condition. Servicing rights are amortized in proportion to and over the period during which estimated servicing
income will be received.
Fair value is based on market prices for comparable servicing contracts, when available, or alternately, is based on a valuation
model that calculates the present value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the
discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
Servicing rights are evaluated for impairment at each reporting date based upon the fair value of the rights as compared to
amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such
as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche,
to the extent that fair value is less than the capitalized amount for the tranche. If management later determines that all or a
portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase
to income.
Other Real Estate Owned
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 operations or for future expansion. OREO is held for
sale and is initially recorded at fair value less costs to sell at the date of acquisition or transfer, which establishes a new cost
basis. Upon acquisition of a property through foreclosure or deed in-lieu of foreclosure, any write-down to fair value less
estimated selling costs is charged to the ALLL. The determination is made on an individual asset basis. Bank premises no
longer used for operations or future expansion is transferred to OREO at fair value less estimated selling costs with any
related write-down included in non-interest expense. Subsequent to acquisition or transfer, valuations of properties are
periodically performed by management and the assets are carried at the lower of cost basis or fair value less estimated cost
to sell. Any subsequent reduction in value of an OREO property is recognized by a write-down included in non-interest
65
expense. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed
agreements of sale. Costs relating to the development and improvement of the OREO properties may be capitalized, while
holding period costs such as real estate taxes and maintenance and repairs are charged to expense as incurred.
Bank Premises and Equipment
Land is stated at cost. Bank premises, equipment and leasehold improvements are stated at cost less accumulated depreciation.
Costs for routine maintenance and repair are expensed as incurred, while significant expenditures for improvements are
capitalized. Depreciation expense is computed generally using the straight-line method over the following ranges of estimated
useful lives, or in the case of leasehold improvements, to the expected terms of the leases, if shorter:
Buildings and improvements (years) ..................................................................................................................
Furniture, fixtures and equipment (years) ..........................................................................................................
Leasehold improvements (years)........................................................................................................................
10 to 40
3 to 15
2 to 39
Intangible Assets
Intangible assets consisted entirely of a core deposit intangible which arose in connection with the acquisition of FNCB’s
Honesdale branch. The core deposit intangible was amortized over an estimated useful life of 10 years. The balance of the
core deposit intangible was $137 thousand at December 31, 2015 and was included in other assets in the consolidated
statements of financial condition. As of December 31, 2016, the core deposit intangible had been fully amortized.
Long-lived Assets
Intangible assets and bank premises and equipment are reviewed by management at least annually for potential impairment
and whenever events or circumstances indicate that carrying amounts may not be recoverable.
Income Taxes
FNCB recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more-likely-than-not that all or some portion of the deferred tax assets will not be realized.
FNCB files a consolidated Federal income tax return. Under tax sharing agreements, each subsidiary provides for and settles
income taxes with FNCB as if it would have filed on a separate return basis. Interest and penalties, if any, as a result of a
taxing authority examination are recognized within non-interest expense. FNCB is not currently subject to an audit by any of
its tax authorities and with limited exception is no longer subject to federal and state income tax examinations by taxing
authorities for years before 2013.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that
would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during
which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the
largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described
above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. Management determined that FNCB had no liabilities for uncertain tax
positions at December 31, 2016 and 2015.
Earnings per Share
Earnings per share is calculated on the basis of the weighted-average number of common shares outstanding during the year.
Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted earnings per share reflect additional shares that
66
would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be
issued by FNCB relate to outstanding stock options and shares of unvested restricted stock, for which the dilutive effect is
calculated using the treasury stock method.
Stock-Based Compensation
FNCB is required to measure and record compensation expense for stock-based payments based on the instrument’s fair
value on the date of the grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The fair value of shares of restricted stock awarded under the Long Term Incentive Compensation Plan
(“LTIP”) is determined using an average of the high and low prices for FNCB’s common stock for the 10 days preceding the
grant date. The fair value of shares of stock granted under Employee Stock Grant Plans is determined using the closing price
of FNCB’s common stock on the grant date. Stock-based compensation expense for stock options and restricted stock is
recognized ratably over the vesting period. Stock-based compensation expense for shares of stock awarded under the
Employee Stock Grant Plans is recognized on the grant date.
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) represents the cash surrender value of life insurance policies on certain current and
former directors and officers of FNCB. FNCB purchased the insurance as a tax-deferred investment and future source of
funding for liabilities, including the payment of employee benefits such as health care. BOLI is carried in the consolidated
statements of financial condition at its cash surrender value. Increases in the cash value of the policies, as well as proceeds
received, are recorded in non-interest income. Under some of these policies, the beneficiaries receive a portion of the death
benefit. The net present value of the future death benefits scheduled to be paid to the beneficiaries was $105 thousand and
$101 thousand at December 31, 2016 and 2015, respectively, and is reflected in other liabilities on the consolidated statements
of financial condition.
Fair Value Measurement
FNCB uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine
fair value disclosures. Available-for-sale securities are recorded at fair value on a recurring basis. Additionally, from time to
time, FNCB may be required to recognize adjustments to other assets at fair value on a nonrecurring basis, such as impaired
loans, other securities, and OREO.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction
that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual
and customary for transactions involving such assets or liabilities: it is not a forced transaction.
Accounting standards define fair value, establish a framework for measuring fair value, establish a three-level hierarchy for
disclosure of fair value measurement and provide disclosure requirements about fair value measurements. The valuation
hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
The three levels of the fair value hierarchy are:
● 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.
● 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.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the shareholders’ equity section of the statement of financial condition, such items, along
with net income, are components of comprehensive income.
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New Authoritative Accounting Guidance
ASU 2014-12, Compensation – Stock Compensation (Topic 718): “Accounting for Share-Based Payments When the Terms
of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period,” requires a
performance target that affects vesting and that can be achieved after the requisite service period to be treated as a performance
condition. To account for such awards, an entity should apply existing guidance as it relates to awards with performance
conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant-date fair value
of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target
will be achieved and should represent compensation cost attributable to the period(s) for which the requisite service already
has been rendered. If the performance target becomes probable of being achieved before the end of the requisite service
period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite
service periods. The total amount of compensation cost should reflect the number of awards that are expected to vest and
should be adjusted to reflect those awards that ultimately vest. ASU 2014-12 is effective for annual periods and interim
periods within those annual periods beginning after December 15, 2015. The adoption of this guidance on January 1, 2016
did not have a material effect on the operating results or financial position of FNCB.
Accounting Guidance to be Adopted in Future Periods
ASU 2014-09, Revenue from Contracts with Customers (Topic 606): Section A, “Summary and Amendments That Create
Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contract with Customers
(Subtopic 340-40);” Section B, “Conforming Amendments to Other Topics and Subtopics in the Codification and Status
Tables;” and Section C, “Background Information and Basis for Conclusions,” provides a robust framework for addressing
revenue recognition issues, and upon its effective date, replaces almost all existing revenue recognition guidance, including
industry specific guidance, in current GAAP. The core principle of ASU 2014-09 is for companies to recognize revenue to
depict the transfer of goods or services to customers in amounts that reflect the consideration to which FNCB expects to be
entitled in exchange for those goods or services. ASU 2014-09 will also result in enhanced interim and annual disclosures,
both qualitative and quantitative, about revenue in order to help financial statement users understand the nature, amount,
timing and uncertainty of revenue and related cash flows. ASU 2014-09 is effective in annual reporting periods beginning
after December 15, 2016 and the interim periods within that year for public business entities, not-for-profit entities that have
issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or over-the-counter market
and employee benefit plans that file or furnish financial statements to the SEC. On August 12, 2015, the FASB issued ASU
2015-14, Revenue from Contracts with Customers (Topic 606): “Deferral of the Effective Date,” which defers the adoption
of ASU 2014-09 for one year for all entities. Accordingly, FNCB will adopt this guidance on January 1, 2018. The guidance
allows an entity to apply the new standard either retrospectively or through a cumulative effect adjustment as of January 1,
2018. FNCB’s largest revenue stream is net interest income, which is explicitly excluded from the scope of ASU 2014-09.
Management is currently evaluating FNCB’s non-interest income revenue streams to determine the impact, if any, this ASU
will have on the operating results or financial position of FNCB.
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): “Recognition and Measurement of Financial Assets and
Financial Liabilities” requires all equity investments to be measured at fair value with changes in the fair value recognized
through net income (other than those accounted for under equity method of accounting or those that result in consolidation
of the investee). The amendments in this ASU also require an entity to present separately in other comprehensive income the
portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when
the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
In addition, this ASU eliminates the requirement to disclose the fair value of financial instruments measured at amortized
cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions
used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the
balance sheet for public business entities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 for
public entities. The adoption of this guidance on January 1, 2018 is not expected to have a material effect on the operating
results or financial position of FNCB.
ASU 2016-02, Leases (Topic 842): “Leases” will require organizations that lease assets to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. Consistent
with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by the
lessee will primarily depend on its classification as a finance or operating lease. However, unlike current GAAP, which
requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be
recognized on the balance sheet. ASU 2016-02 will also require disclosures to help investors and other financial statement
users better understand the amount, timing and uncertainty of cash flows arising from leases. The new disclosures will include
both qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial
statements. ASU 2016-02 is effective with fiscal years, and interim periods within those fiscal years, beginning after
68
December 15, 2018 for public entities. Accordingly, FNCB will adopt this guidance on January 1, 2019, and is currently
evaluating the effect this guidance may have on its operating results or financial position.
ASU 2016-09, Compensation – Stock Compensation (Topic 718): “Improvements to Employee Share-Based Payment
Accounting” simplifies several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash
flows. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2016 for public entities. The adoption of this guidance on January 1, 2017 is not expected to have a material
effect on the operating results or financial position of FNCB.
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,”
replaces the current loss impairment methodology under GAAP with a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and supportable information to form credit loss estimates in an effort
to provide financial statement users with more decision-useful information about the expected credit losses on financial
instruments and other commitments to extend credit. Specifically, the amendments in this ASU will require a financial asset
(or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.
The amendments in this update affect entities holding financial assets and net investment in leases that are not accounted for
at fair value through net income, including such financial assets as loans, debt securities, trade receivables, net investments
in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the
scope that have the contractual right to receive cash. On June 17, 2016, the four federal financial institution regulatory
agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National
Credit Union Administration and the Office of the Comptroller of the Currency), issued a joint statement to provide
information about ASU 2016-13 and the initial supervisory views regarding the implementation of the new standard. The
joint statement applies to all banks, savings associations, credit unions and financial institution holding companies, regardless
of asset size. The statement details the key elements of, and the steps necessary for, the successful transition to the new
accounting standard. In addition, the statement notifies financial institutions that because the appropriate allowance levels
are institution-specific amounts, the agencies will not establish benchmark targets or ranges for the change in institutions’
allowance levels upon adoption of the ASU, or for allowance levels going forward. Due to the importance of ASU 2016-13,
the agencies encourage financial institutions to begin planning and preparing for the transition and state that senior
management, under the oversight of the board of directors, should work closely with staff in their accounting, lending, credit
risk management, internal audit, and information technology functions during the transition period leading up to, and well
after, adoption. ASU 2016-13 is effective for public business entities that are U.S. Securities and Exchange Commission
(“SEC”) filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All
entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. Accordingly, FNCB will adopt this guidance on January 1, 2020. FNCB has created
a Current Expected Credit Loss (“CECL”) task group comprised of members of its finance, credit administration, lending,
internal audit, loan operations and information systems units. The CECL task group has begun the process of planning and
preparing for the transition to the new guidance including, but not limited to: (1) becoming familiar with ASU 2016-13; (2)
determining a course of action appropriate to FNCB’s nature, scope and risk of its lending and investing activities; (3)
reviewing the existing allowance and credit risk management practices to identify processes that may be leveraged when
applying the new guidance; (4) identifying data needs and changes that may be necessary to its core operating system to
implement the new accounting guidance; and (5) evaluating the effect this guidance may have on FNCB’s operating results
and/or financial position, including assessing any potential impact on its capital.
ASU 2016-15, Statement of Cash Flows (Topic 230): “Classification of Certain Cash Receipts and Cash Payments,” provides
guidance on eight specific cash flow issues in order to reduce current and potential future diversity in reporting. The specific
cash flow items addressed include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments
with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent
consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from
the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received
from equity method investees, beneficial interest in securitization transactions, and separately identifiable cash flows and
application of the predominance principle. ASU 2016-15 is effective for public business entities for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. ASU 2016-15 is effective for all entities that are
required to present a statement of cash flows under Topic 320, and early adoption is permitted. The adoption of this guidance
on January 1, 2018 is not expected to have a material effect on the operating results or financial position of FNCB.
69
Note 3. RESTRICTED CASH BALANCES
FNCB is required to maintain certain average reserve balances as established by the Federal Reserve Bank. The amount of
those reserve balances for the reserve computation periods which included December 31, 2016 and 2015 were $1.5 million
and $1.0 million, respectively. FNCB satisfied the required reserve balances through the restriction of vault cash and deposits
maintained at the Federal Reserve Bank.
In addition, FNCB maintains compensating balances at correspondent banks, most of which are not required, but are used to
offset specific charges for services. At December 31, 2016 and 2015, the amount of these balances was $133 thousand and
$173 thousand, respectively.
Note 4. SECURITIES
The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of the FNCB’s securities
at December 31, 2016 and 2015:
(in thousands)
Available-for-sale:
Obligations of U.S. government agencies .................................... $
Obligations of state and political subdivisions .............................
U.S. government/government-sponsored agencies:
December 31, 2016
Gross
Gross
Unrealized Unrealized
Amortized Holding Holding
Cost
Gains
Losses
Fair
Value
12,152 $
119,919
36 $
257
- $
2,303
12,188
117,873
Collateralized mortgage obligations - residential .....................
Collateralized mortgage obligations - commercial ...................
Mortgage-backed securities ......................................................
Corporate debt securities ..............................................................
Negotiable certificates of deposit .................................................
Equity securities ...........................................................................
17,969
100,064
20,593
500
3,172
1,010
Total available-for-sale securities ............................................ $ 275,379 $
155
154
159
-
44
-
805 $
40
868
176
47
-
74
3,508 $
18,084
99,350
20,576
453
3,216
936
272,676
December 31, 2015
Gross
Gross
Unrealized Unrealized
Amortized Holding Holding
Cost
Gains
Losses
Fair
Value
(in thousands)
Available-for-sale:
Obligations of U.S. government agencies .................................... $
Obligations of state and political subdivisions .............................
U.S. government/government-sponsored agencies:
43,787 $
75,401
Collateralized mortgage obligations - residential .....................
Collateralized mortgage obligations - commercial ...................
Mortgage-backed securities ......................................................
Corporate debt securities ..............................................................
Negotiable certificates of deposit .................................................
Equity securities ...........................................................................
22,162
89,900
18,201
500
3,173
1,010
Total available-for-sale securities ............................................ $ 254,134 $
256 $
428
116
124
58
-
-
-
982 $
- $
422
44,043
75,407
9
601
161
77
11
62
1,343 $
22,269
89,423
18,098
423
3,162
948
253,773
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 December 31, 2016 or 2015.
70
The following table shows the amortized cost and approximate fair value of FNCB’s available-for-sale debt securities at
December 31, 2016 using contractual maturities. Expected maturities will differ from contractual maturity because issuers
may have the right to call or prepay obligations with or without call or prepayment penalties. Because collateralized mortgage
obligations and residential mortgage-backed securities are not due at a single maturity date, they are not included in the
maturity categories in the following maturity summary.
December 31, 2016
Available-for-Sale
Amortized
(in thousands)
Amounts maturing in:
One year or less ................................................................................................................ $
One year through five years .............................................................................................
After five years through ten years ....................................................................................
After ten years ..................................................................................................................
Collateralized mortgage obligations .................................................................................
Mortgage-backed securities ..............................................................................................
Total .............................................................................................................................. $
Cost
248 $
29,647
100,177
5,671
118,033
20,593
274,369 $
Fair
Value
249
29,649
98,217
5,615
117,434
20,576
271,740
The following table presents the gross proceeds received and gross realized gains and losses on sales of available-for-sale
and held-to-maturity securities for each of the three years ended December 31, 2016, 2015 and 2014.
(in thousands)
Available-for-sale:
Gross proceeds received ..................................................................... $
Gross realized gains ...........................................................................
Gross realized losses ..........................................................................
Held-to-maturity:
Gross proceeds received ..................................................................... $
Gross realized gains ...........................................................................
Gross realized losses ..........................................................................
Year Ended December 31,
2015
2016
2014
32,588 $
960
-
88,658 $
2,325
(29 )
111,243
6,272
-
- $
-
-
- $
-
-
2,686
368
-
FNCB sold its entire held-to-maturity portfolio consisting of four obligations of state and political subdivisions with an
aggregate amortized cost of $2.3 million during the year ended December 31, 2014. The four securities were tax-exempt,
zero-coupon bonds of California municipalities. These securities were sold as part of management’s strategy to reduce the
amount of potential credit and concentration risk in the investment portfolio, and as part of tax planning strategies aimed at
reducing tax-exempt interest income. Since the held-to-maturity securities were sold for reasons other than those permitted
under GAAP, FNCB did not classify any securities as held-to-maturity in 2015 and 2016.
71
The following tables present the number of, fair value and gross unrealized losses of available-for-sale securities with
unrealized losses at December 31, 2016 and 2015, aggregated by investment category and length of time the securities have
been in an unrealized loss position.
Less than 12 Months
December 31, 2016
12 Months or Greater
Total
(dollars in thousands)
Obligations of U.S.
Number
of
Fair
Securities Value
Gross
Unrealized
Losses
Number
of
Fair
Securities Value Losses
Gross
Unrealized
Number
of
Fair
Securities Value
Gross
Unrealized
Losses
government agencies ...........
- $
- $
-
- $
- $
Obligations of state and
policitical subdivisions ........
82
88,479
2,303
-
-
U.S. government/government-
sponsored agencies:
Collateralized mortgage
obligations - residential .....
2
4,514
Collateralized mortgage
obligations - commercial ...
17
70,146
Mortgage-backed
securities ............................
Corporate debt securities ........
Negotiable certificates of
deposit ..................................
Equity Securities .....................
Total ........................................
5
-
6,495
-
-
-
-
-
106 $ 169,634 $
-
-
3,387
40
868
176
-
1
175
-
-
1
-
-
453
-
-
926
1
3 $ 1,554 $
-
-
-
-
-
47
-
74
121
- $
- $
-
82
88,479
2,303
3
4,689
17
70,146
5
1
6,495
453
-
1
-
926
109 $ 171,188 $
40
868
176
47
-
74
3,508
Less than 12 Months
December 31, 2015
12 Months or Greater
Total
(dollars in thousands)
Obligations of U.S.
Number
of
Fair
Securities Value
Gross
Unrealized
Losses
Number
of
Fair
Securities Value Losses
Gross
Unrealized
Number
of
Fair
Securities Value
Gross
Unrealized
Losses
government agencies ...........
- $
- $
-
- $
- $
Obligations of state and
policitical subdivisions ........
31
33,022
419
1
264
U.S. government/government-
sponsored agencies:
Collateralized mortgage
obligations - residential .....
4
5,738
Collateralized mortgage
obligations - commercial ...
16
67,969
Mortgage-backed
securities ............................
Corporate debt securities ........
Negotiable certificates of
deposit ..................................
Equity Securities .....................
Total ........................................
7
-
16,779
-
12
-
2,913
-
70 $ 126,421 $
11
-
1,201
9
601
161
-
-
-
-
1
-
-
-
423
-
-
1
938
3 $ 1,625 $
-
3
-
-
-
77
-
62
142
- $
- $
-
32
33,286
422
4
5,738
16
67,969
7
1
16,779
423
12
1
2,913
938
73 $ 128,046 $
9
601
161
77
11
62
1,343
Management evaluates individual securities in an unrealized loss position quarterly for OTTI. As part of its evaluation,
management considers, among other things, the length of time a security’s fair value is less than its amortized cost, the
severity of decline, any credit deterioration of the issuer, whether or not management intends to sell the security, and whether
it is more likely than not that FNCB will be required to sell the security prior to recovery of its amortized cost.
There were 109 securities in an unrealized loss position at December 31, 2016, including 25 securities issued by a U.S.
government or government-sponsored agency, 82 obligations of state and political subdivisions, one corporate bond and one
equity security. Management performed a review of the fair values of all securities in an unrealized loss position as of
December 31, 2016 and determined that movements in the fair values of the securities were consistent with the change in
market interest rates. In addition, as part of its review, management noted that there was no material change in the credit
quality of any of the issuers or any other event or circumstance that may cause a significant adverse effect on the fair value
of these securities. Moreover, to date, FNCB has received all scheduled principal and interest payments and expects to fully
collect all future contractual principal and interest payments on all securities in an unrealized loss position at December 31,
2016. 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 and
equity securities, management concluded that the individual unrealized losses were temporary and OTTI did not exist at
December 31, 2016.
72
Investments in FHLB of Pittsburgh and Federal Reserve Bank of Philadelphia (“FRB”) stock have limited marketability and
are carried at cost. FNCB’s investment in FHLB of Pittsburgh stock totaled $3.3 million and $6.3 million at December 31,
2016 and 2015, respectively. During the year ended December 31, 2016, the Bank canceled its membership with the FRB,
and as a result, the entire balance of FRB stock totaling $1.3 million was redeemed. FRB stock of $1.3 million is included in
other assets in the consolidated statements of financial condition at December 31, 2015. Management noted no indicators of
impairment for the FHLB of Pittsburgh stock at December 31, 2016 and 2015.
Note 5. LOANS
The following table summarizes loans receivable, net, by category at December 31, 2016 and 2015:
(in thousands)
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 costs .....................................................................................
Allowance for loan and lease losses .................................................................
Loans, net .................................................................................................. $
December 31,
2016
2015
144,260 $
243,830
18,357
153,758
127,844
43,709
731,758
(48)
2,569
(8,419)
725,860 $
130,696
245,198
30,843
149,826
128,533
46,056
731,152
(98)
2,662
(8,790)
724,926
FNCB has granted loans, letters of credit and lines of credit to certain of its executive officers and directors as well as to
certain of their related parties. For more information about related party transactions, refer to Note 11, “Related Party
Transactions” to these consolidated financial statements.
For information about credit concentrations within FNCB’s loan portfolio, refer to Note 12, “Commitments, Contingencies
and Concentrations” to these consolidated financial statements.
FNCB originates one- to four-family mortgage loans for sale in the secondary market. During the years ended December 31,
2016, 2015 and 2014, FNCB sold $9.5 million, $7.9 million and $8.3 million of one- to four-family mortgages, respectively.
Net gains on the sale of residential mortgage loans for the years ended December 31, 2016, 2015 and 2014 were $340
thousand, $292 thousand and $292 thousand, respectively. FNCB retains servicing rights on these mortgages. At December
31, 2016 and December 31, 2015, there were $596 thousand and $683 thousand in one- to four-family residential mortgage
loans held for sale, respectively.
During the year ended December 31, 2016, FNCB sold the guaranteed principal balance of three loans that were guaranteed
by the SBA totaling $1.3 million. A net gain of $51 thousand was realized upon the sale and included in non-interest income
for the year ended December 31, 2016. FNCB retained the servicing rights on these loans. There were no sales of guaranteed
loans during the years ended December 31, 2015 or 2014. The unpaid principal balance of loans serviced for others, including
residential mortgages and SBA guaranteed loans were $103.5 million and $110.7 million at December 31, 2016 and 2015,
respectively.
FNCB sold all of its education loans, which are categorized as consumer loans, to a third party during the year ended
December 31, 2014. The education loans had a recorded investment of $2.6 million at the time of sale. FNCB recognized a
loss of $13 thousand upon the sale of these loans which is included in non-interest income for the year ended December 31,
2014. FNCB did not retain the servicing on these loans.
FNCB does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets
borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments,
and bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden
ratios.
73
FNCB provides for loan losses based on the consistent application of its documented ALLL methodology. Loan losses are
charged to the ALLL and recoveries are credited to it. Additions to the ALLL are provided by charges against income based
on various factors which, in management’s judgment, deserve current recognition of estimated probable losses. Loan losses
are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Generally, FNCB will record a loan
charge-off (including a partial charge-off) to reduce a loan to the estimated recoverable amount based on its methodology
detailed below. Management regularly reviews the loan portfolio and makes adjustments for loan losses in order to maintain
the ALLL in accordance with GAAP. The ALLL consists primarily of the following two components:
(1) Specific allowances are established for impaired loans, which FNCB defines as all loan relationships with an
aggregate outstanding balance greater than $100 thousand that are rated substandard and on nonaccrual status, rated
doubtful or loss, and all TDRs. The amount of impairment provided for as an allowance is represented by the
deficiency, if any, between the carrying value of the loan and either (a) the present value of expected future cash
flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price, or (c) the fair value of
the underlying collateral, less estimated costs to sell, for collateral dependent loans. Impaired loans that have no
impairment losses are not considered for general valuation allowances described below. If management determines
that collection of the impairment amount is remote, a charge-off will be recorded for the impairment amount.
(2) General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of
impaired. FNCB divides its portfolio into loan segments for loans exhibiting similar characteristics. Loans rated
special mention or substandard and accruing, which are embedded in these loan segments, are then separated from
these loan segments, as these loans are subject to an analysis that emphasizes the credit risk associated with these
loans. An estimated loss rate is then applied to each loan segment, which are based on FNCB’s own historical loss
experience for each respective loan segment. In addition, management evaluates and applies to each loan segment
certain qualitative or environmental factors that are likely to cause estimated credit losses associated with FNCB’s
existing portfolio to differ from historical experience, which are discussed below. For loans that have an internal
credit rating of special mention or substandard, the qualitative and environmental factors are further adjusted for the
increased risk.
As part of its evaluation, management considers qualitative and environmental factors, including, but not limited to:
●
●
●
●
●
●
●
●
●
changes in national, local, and business economic conditions and developments, including the condition of various
market segments;
changes in the nature and volume of the 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 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.
Management evaluates the credit quality of the loan portfolio on an ongoing basis, and performs a formal review of the
adequacy of the ALLL on a quarterly basis. This evaluation is inherently subjective, as it requires material estimates that may
be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses
may be significantly more than the ALLL that is established, which could have a material negative effect on FNCB’s
operating results or financial condition. While management uses the best information available to make its evaluations, future
adjustments to the ALLL may be necessary if conditions differ substantially from the information used in making the
evaluations. Bank 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.
Based on its evaluation of the ALLL, management had established an unallocated reserve of $74 thousand at December 31,
2015. As previously mentioned, as part of its evaluation, management applies loss rates to each loan segment. These loan
rates are based on historical loss experience for the previous twelve consecutive quarters, which had resulted in an overall
negative historical loss factor and consequently negative provisions for the commercial and industrial loan segment at
December 31, 2015. Based on the risk characteristics inherent in this segment of the portfolio, management reversed the
74
negative provision and established the unallocated reserve. As of December 31, 2016, the unallocated reserve had been
reversed as the loss history for this segment is no longer negative.
The following tables present, by loan category, the activity in the ALLL and the allocation of the ALLL and related loan
balance disaggregated based on impairment methodology at December 31, 2016, 2015 and 2014.
Allowance for Loan and Lease Losses by Loan Category
December 31, 2016
Real Estate
(in thousands)
Allowance for loan losses:
Residential
Real Estate
Commercial
Real Estate
Construction,
Land
Acquisition and
Development
Commercial
and Industrial
Consumer
State and
Political
Subdivisions
Unallocated
Total
Beginning balance, January 1, 2016 ........ $
Charge-offs .........................................
Recoveries ..........................................
Provisions (credits) .............................
Ending balance, December 31, 2016 ....... $
1,333 $
(153)
4
(13)
1,171 $
3,346 $
(398)
6
343
3,297 $
853 $
-
9
(594)
268 $
1,205 $
(1,107)
507
1,131
1,736 $
1,494 $
(960)
568
355
1,457 $
485 $
-
-
5
490 $
74 $
-
-
(74)
- $
8,790
(2,618)
1,094
1,153
8,419
Ending balance, December 31, 2016:
Specific reserve ....................................... $
Ending balance, December 31, 2016:
General reserve ........................................ $
Loans receivable:
29 $
254 $
- $
18 $
1 $
- $
- $
302
1,142 $
3,043 $
268 $
1,718 $
1,456 $
490 $
- $
8,117
Ending balance, December 31, 2016 ....... $
144,260 $
243,830 $
18,357 $
153,758 $
127,844 $
43,709 $
- $ 731,758
Ending balance, December 31, 2016:
Individually evaluated for impairment .... $
Ending balance, December 31, 2016:
Collectively evaluated for impairment .... $
1,929 $
2,937 $
350 $
91 $
297 $
- $
- $
5,604
142,331 $
240,893 $
18,007 $
153,667 $
127,547 $
43,709 $
- $ 726,154
Allowance for Loan and Lease Losses by Loan Category
December 31, 2015
Real Estate
(in thousands)
Allowance for loan losses:
Residential
Real Estate
Commercial
Real Estate
Construction,
Land
Acquisition and
Development
Commercial
and Industrial
Consumer
State and
Political
Subdivisions
Unallocated
Total
Beginning balance, January 1, 2015 ........ $
Charge-offs .........................................
Recoveries ..........................................
Provisions (credits) .............................
Ending balance, December 31, 2015 ....... $
1,772 $
(139)
58
(358)
1,333 $
4,663 $
(912)
307
(712)
3,346 $
665 $
(688)
-
876
853 $
2,104 $
(180)
400
(1,119)
1,205 $
1,673 $
(716)
485
52
1,494 $
598 $
-
-
(113)
485 $
45 $
-
-
29
74 $
11,520
(2,635)
1,250
(1,345)
8,790
Ending balance, December 31, 2015:
Specific reserve ....................................... $
Ending balance, December 31, 2015:
General reserve ........................................ $
Loans receivable:
92 $
287 $
1 $
- $
1 $
- $
- $
381
1,241 $
3,059 $
852 $
1,205 $
1,493 $
485 $
74 $
8,409
Ending balance, December 31, 2015 ....... $
130,696 $
245,198 $
30,843 $
149,826 $
128,533 $
46,056 $
- $ 731,152
Ending balance, December 31, 2015:
Individually evaluated for impairment .... $
Ending balance, December 31, 2015:
Collectively evaluated for impairment .... $
2,930 $
3,831 $
646 $
203 $
351 $
- $
- $
7,961
127,766 $
241,367 $
30,197 $
149,623 $
128,182 $
46,056 $
- $ 723,191
75
Allowance for Loan and Lease Losses by Loan Category
December 31, 2014
Real Estate
(in thousands)
Allowance for loan losses:
Residential
Real Estate
Commercial
Real Estate
Construction,
Land
Acquisition and
Development
Commercial
and Industrial
Consumer
State and
Political
Subdivisions
Unallocated
Total
Beginning balance, January 1, 2014 ........ $
Charge-offs .........................................
Recoveries ..........................................
Provisions (credits) .............................
Ending balance, December 31, 2014 ....... $
2,287 $
(204)
90
(401)
1,772 $
6,017 $
-
362
(1,716)
4,663 $
924 $
(45)
3,538
(3,752)
665 $
2,321 $
(217)
262
(262)
2,104 $
1,789 $
(922)
508
298
1,673 $
679 $
-
-
(81)
598 $
- $
-
-
45
45 $
14,017
(1,388 )
4,760
(5,869 )
11,520
Ending balance, December 31, 2014:
Specific reserve ....................................... $
Ending balance, December 31, 2014:
General reserve ........................................ $
Loans receivable:
51 $
331 $
1 $
- $
1 $
- $
- $
384
1,721 $
4,332 $
664 $
2,104 $
1,672 $
598 $
45 $
11,136
Ending balance, December 31, 2014 ....... $
122,832 $
233,473 $
18,835 $
132,057 $
122,092 $
40,205 $
- $ 669,494
Ending balance, December 31, 2014:
Individually evaluated for impairment .... $
Ending balance, December 31, 2014:
Collectively evaluated for impairment .... $
2,487 $
6,660 $
256 $
32 $
361 $
- $
- $
9,796
120,345 $
226,813 $
18,579 $
132,025 $
121,731 $
40,205 $
- $ 659,698
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 these loan receivables.
FNCB’s commercial loan classification and credit grading processes are part of the lending, underwriting, and credit
administration functions to ensure an ongoing assessment of credit quality. FNCB maintains a formal, written loan
classification and credit grading system that includes a discussion of the factors used to assign appropriate classifications of
credit grades to loans. The risk grade groupings provide a mechanism to identify risk within the loan portfolio and provide
management and the Board with periodic reports by risk category. The process also identifies groups of loans that warrant
the special attention of management. Accurate and timely loan classification and credit grading is a critical component of
loan portfolio management. Loan officers are required to review their loan portfolio risk ratings regularly for accuracy. In
addition, the credit risk ratings play an important role in the loan review function, as well as the establishment and evaluation
of the provision for loan and lease losses and the ALLL.
The loan review function uses the same risk rating system in the loan review process. Quarterly, FNCB engages an
independent third party to assess the quality of the loan portfolio and evaluate the accuracy of ratings with the loan officer’s
and management’s assessment.
76
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 its 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 considered collectively for ALLL calculation purposes. However, accruing
TDRs that have been performing for an extended period of time, 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 of the weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable based on
current circumstances.
Loss - Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is
not warranted.
Credit Quality Indicators – Other Loans
Certain residential real estate loans, consumer loans, and commercial indirect auto loans are monitored on a pool basis due
to their homogeneous nature. Loans that are delinquent 90 days or more are placed on non-accrual status unless collection of
the loan is in process and reasonably assured. FNCB utilizes accruing versus non-accrual status as the credit quality indicator
for these loan pools.
77
The following tables present the recorded investment in loans receivable by loan category and credit quality indicator at
December 31, 2016 and 2015:
Credit Quality Indicators
December 31, 2016
Commercial Loans
Special
Other Loans
Non-
accrual
Accruing
Subtotal
Subtotal
Pass
Mention Substandard Doubtful Loss Commercial Loans
Loans Other
Total
Loans
Residential real
estate ....................... $
25,506 $
394 $
466 $
- $
- $
26,366 $ 117,286 $
608 $ 117,894 $ 144,260
Commercial real
estate ....................... 233,523
4,911
5,396
-
-
243,830
-
-
- 243,830
Construction, land
acquisition and
development ...........
Commercial and
14,101
346
448
-
-
14,895
3,462
-
3,462
18,357
industrial ................. 145,794
2,699
Consumer ...................
State and political
2,794
-
subdivisions ............
2,964
Total ...................... $ 462,047 $ 11,409 $
40,424
1,128
37
321
7,796 $
-
-
-
- $
-
-
-
- $
149,716
2,736
4,042
124,935
-
4,042 153,758
173 125,108 127,844
43,709
-
481,252 $ 249,725 $
-
43,709
781 $ 250,506 $ 731,758
-
Credit Quality Indicators
December 31, 2015
Commercial Loans
Special
Other Loans
Non-
accrual
Accruing
Subtotal
Subtotal
Pass
Mention Substandard Doubtful Loss Commercial Loans
Loans Other
Total
Loans
Residential real
estate ....................... $
21,018 $
449 $
984 $
- $
- $
22,451 $ 107,204 $
1,041 $ 108,245 $ 130,696
Commercial real
estate ....................... 225,850
11,356
7,992
-
-
245,198
-
-
- 245,198
Construction, land
acquisition and
development ...........
Commercial and
23,946
358
5,137
-
-
29,441
1,402
-
1,402
30,843
industrial ................. 142,242
2,747
Consumer ...................
State and political
595
9
subdivisions ............
120
Total ...................... $ 461,267 $ 12,887 $
45,464
2,209
39
472
16,833 $
-
-
-
- $
-
-
-
- $
145,046
2,795
4,775
125,392
5
4,780 149,826
346 125,738 128,533
46,056
-
490,987 $ 238,773 $
-
46,056
1,392 $ 240,165 $ 731,152
-
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 $2.2 million and $3.8
million at December 31, 2016 and 2015, respectively. Generally, loans are placed on non-accrual status when they become
90 days or more delinquent, and remain on non-accrual status until they are brought current, have six months of performance
under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exists.
Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a
non-accrual status. There were no loans past due 90 days or more and still accruing at December 31, 2016 and 2015.
78
The following tables present the delinquency status of past due and non-accrual loans at December 31, 2016 and 2015:
December 31, 2016
Delinquency Status
(in thousands)
Performing (accruing) loans:
Real estate:
0-29 Days 30-59 Days 60-89 Days >/= 90 Days
Past Due
Past Due
Past Due
Past Due
Total
Residential real estate .............................. $
Commercial real estate ............................
Construction, land acquisition and
143,142 $
241,477
229 $
830
development ..........................................
Total real estate ...........................................
17,766
402,385
346
1,405
107 $
553
-
660
- $
-
143,478
242,860
-
-
18,112
404,450
Commercial and industrial ..........................
153,378
307
9
-
153,694
Consumer ....................................................
126,341
1,030
300
-
127,671
State and political subdivisions ...................
Total performing (accruing) loans ...............
43,709
725,813
-
2,742
-
969
-
-
43,709
729,524
Non-accrual loans:
Real estate:
Residential real estate ..............................
Commercial real estate ............................
Construction, land acquisition and
development ..........................................
Total real estate ...........................................
Commercial and industrial ..........................
Consumer ....................................................
State and political subdivisions ...................
Total non-accrual loans ...............................
176
201
-
377
-
56
-
433
202
23
245
470
-
25
-
495
17
-
-
17
-
2
-
19
387
746
-
1,133
64
90
-
1,287
782
970
245
1,997
64
173
-
2,234
Total loans receivable.................................. $
726,246 $
3,237 $
988 $
1,287 $
731,758
79
December 31, 2015
Delinquency Status
0-29 Days 30-59 Days 60-89 Days >/= 90 Days
Past Due
Past Due
Past Due
Past Due
Total
(in thousands)
Performing (accruing) loans:
Real estate:
Residential real estate .............................. $
Commercial real estate ............................
Construction, land acquisition and
129,206 $
243,168
development ..........................................
Total real estate ...........................................
30,475
402,849
51 $
53
26
130
225 $
286
-
511
- $
-
129,482
243,507
-
-
30,501
403,490
Commercial and industrial ..........................
149,329
236
66
-
149,631
Consumer ....................................................
126,760
994
433
-
128,187
State and political subdivisions ...................
Total peforming (accruing) loans ................
46,056
724,994
-
1,360
-
1,010
-
-
46,056
727,364
Non-accrual loans:
Real estate:
Residential real estate ..............................
Commercial real estate ............................
Construction, land acquisition and
development ..........................................
Total real estate ...........................................
Commercial and industrial ..........................
Consumer ....................................................
923
1,576
342
2,841
98
69
99
-
-
99
-
21
State and political subdivisions ...................
Total non-accrual loans ...............................
-
3,008
-
120
44
115
-
159
-
3
-
162
148
-
-
148
97
253
-
498
1,214
1,691
342
3,247
195
346
-
3,788
Total loans receivable.................................. $
728,002 $
1,480 $
1,172 $
498 $
731,152
80
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 December 31, 2016 and 2015. Non-
accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold are not evaluated
individually for impairment and accordingly, are not included in the following tables. However, these loans are evaluated
collectively for impairment as homogenous pools in the general allowance under ASC Topic 450. Total non-accrual loans,
other than TDRs, with balances less than the $100 thousand loan relationship threshold that were evaluated under ASC Topic
450 amounted to $0.8 million at both December 31, 2016 and 2015.
(in thousands)
With no allowance recorded:
Real estate:
Residential real estate ............................................................ $
Commercial real estate .........................................................
Construction, land acquisition and development ..................
Total real estate ...........................................................................
Commercial and industrial ...........................................................
Consumer .....................................................................................
State and political subdivisions ....................................................
Total impaired loans with no related allowance recorded ............
With a related allowance recorded:
Real estate:
Residential real estate ............................................................
Commercial real estate ..........................................................
Construction, land acquisition and development ..................
Total real estate ...........................................................................
Commercial and industrial ...........................................................
Consumer .....................................................................................
State and political subdivisions ....................................................
Total impaired loans with a related allowance recorded ..............
Total of impaired loans
Real estate:
Residential real estate ............................................................
Commercial real estate ..........................................................
Construction, land acquisition and development ..................
Total real estate ...........................................................................
Commercial and industrial ...........................................................
Consumer .....................................................................................
State and political subdivisions ....................................................
Total impaired loans .................................................................... $
December 31, 2016
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
386 $
1,066
350
1,802
73
-
-
1,875
1,543
1,871
-
3,414
18
297
-
3,729
1,929
2,937
350
5,216
91
297
-
5,604 $
477 $
1,143
766
2,386
105
-
-
2,491
1,543
1,871
-
3,414
18
297
-
3,729
2,020
3,014
766
5,800
123
297
-
6,220 $
-
-
-
-
-
-
-
-
29
254
-
283
18
1
-
302
29
254
-
283
18
1
-
302
81
(in thousands)
With no allowance recorded:
Real estate:
December 31, 2015
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Residential real estate ............................................................ $
Commercial real estate .........................................................
Construction, land acquisition and development ..................
Total real estate ...........................................................................
1,042 $
1,850
470
3,362
1,138 $
2,868
844
4,850
Commercial and industrial ...........................................................
124
156
Consumer .....................................................................................
-
-
State and political subdivisions ....................................................
Total impaired loans with no related allowance recorded ............
-
3,486
-
5,006
With a related allowance recorded:
Real estate:
Residential real estate ............................................................
Commercial real estate ..........................................................
Construction, land acquisition and development ..................
Total real estate ...........................................................................
Commercial and industrial ...........................................................
Consumer .....................................................................................
State and political subdivisions ....................................................
Total impaired loans with a related allowance recorded ..............
Total of impaired loans
Real estate:
Residential real estate ............................................................
Commercial real estate ..........................................................
Construction, land acquisition and development ..................
Total real estate ...........................................................................
Commercial and industrial ...........................................................
Consumer .....................................................................................
State and political subdivisions ....................................................
Total impaired loans .................................................................... $
1,888
1,981
176
4,045
79
351
-
4,475
2,930
3,831
646
7,407
203
351
-
7,961 $
1,888
1,981
176
4,045
79
351
-
4,475
3,026
4,849
1,020
8,895
235
351
-
9,481 $
-
-
-
-
-
-
-
-
92
287
1
380
-
1
-
381
92
287
1
380
-
1
-
381
The total recorded investment in impaired loans, which consists of non-accrual loans with an aggregate loan relationship
greater than $100,000 and TDRs, amounted to $5.6 million and $8.0 million at December 31, 2016 and 2015, respectively.
The related allowance on impaired loans was $0.3 million and $0.4 million at December 31, 2016 and 2015, respectively.
82
The following table presents the average balance and the interest income recognized on impaired loans for the years ended
December 31, 2016, 2015 and 2014:
(in thousands)
Real estate:
2016
Year Ended December 31,
2015
2014
Average
Balance
Interest
Income (1)
Average
Balance
Interest
Income (1)
Average
Balance
Interest
Income (1)
Residential real estate ................ $
Commercial real estate ..............
Construction, land acquisition
2,428 $
3,489
91 $
92
3,157 $
6,830
121 $
106
2,226 $
6,616
and development .....................
Total real estate .............................
428
6,345
7
190
570
10,557
18
245
284
9,126
Commercial and industrial ............
283
2
174
2
76
Consumer ......................................
300
10
356
11
343
State and political subdivisions .....
-
-
-
-
-
91
118
15
224
-
11
-
Total impaired loans ...................... $
6,928 $
202 $
11,087 $
258 $
9,545 $
235
(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 $0.2 million for the year ended December 31, 2016, and $0.4 million
for each of the years ended December 31, 2015 and 2014.
Troubled Debt Restructured Loans
TDRs at December 31, 2016 and 2015 were $4.3 million and $5.8 million, respectively. Accruing and non-accruing TDRs
were $4.2 million and $0.1 million, respectively at December 31, 2016 and $5.0 million and $0.8 million, respectively at
December 31, 2015. Approximately $261 thousand and $295 thousand in specific reserves have been established for TDRs
as of December 31, 2016 and 2015, respectively. FNCB was not committed to lend additional funds to any loan classified as
a TDR at December 31, 2016 and 2015.
The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest
rate of the loan, an extension of the maturity date, capitalization of real estate taxes, or a permanent reduction of the recorded
investment in the loan.
The following tables show the pre- and post-modification recorded investment in loans modified as TDRs during the years
ended December 31, 2016 and 2015:
For the Year Ended December 31, 2016 For the Year Ended December 31, 2015
Post-
Pre-
Modification
Post-
Modification
Number Outstanding Outstanding Number Outstanding Outstanding
Recorded Recorded
Contracts Investments Investments Contracts Investments Investments
Pre-
Modification
Recorded Recorded
Modification
of
of
2 $
-
-
2
-
-
254 $
-
-
52
-
-
258
-
-
52
-
-
5 $
1
1
1
-
-
810 $
1,654
96
79
-
-
827
742
96
79
-
-
(in thousands)
Troubled debt restructurings:
Residential real estate ...................
Commercial real estate .................
Construction, land acquisition and
development ...............................
Commercial and industrial ...........
Consumer .....................................
State and political subdivisions ....
Total new troubled debt
restructurings ..........................
4 $
306 $
310
8 $
2,639 $
1,744
83
The following table presents the type of modifications made during the years ended December 31, 2016 and 2015:
For the Year Ended December 31, 2016
(in thousands)
Type of modification:
Residential real estate ................................................... $
Commercial real estate .................................................
Construction, land acquisition and development ..........
Commercial and industrial ...........................................
Consumer .....................................................................
State and political subdivisions ....................................
Total modifications ................................................... $
(in thousands)
Type of modification:
Residential real estate ................................................... $
Commercial real estate .................................................
Construction, land acquisition and development ..........
Commercial and industrial ...........................................
Consumer .....................................................................
State and political subdivisions ....................................
Total modifications ................................................... $
Extension of
Term and
Capitalization
of Taxes
Principal
Forbearance
Total
Modifications
Extension of
Term
159 $
-
-
52
-
-
211 $
95 $
-
-
-
-
-
95 $
- $
-
-
-
-
-
- $
254
-
-
52
-
-
306
For the Year Ended December 31, 2015
Extension of
Term and
Capitalization
of Taxes
Principal
Forbearance
Total
Modifications
Extension of
Term
710 $
-
96
-
-
-
806 $
100 $
-
-
-
-
-
100 $
- $
1,654
-
79
-
-
1,733 $
810
1,654
96
79
-
-
2,639
The TDRs described above increased the allowance for loan losses by $1 thousand and $2 thousand through allocation of a
specific reserve for the years ended December 31, 2016 and 2015, respectively. During the year ended December 31, 2015,
there was one commercial real estate loan that was modified with a recorded investment prior to modification of $1.7 million.
Pursuant to the modification, management conducted an analysis and determined that there was impairment on the loan.
Accordingly, FNCB recorded a $912 thousand partial charge-off related to this loan. Charge-offs that resulted from the TDRs
during the year ended December 31, 2015 totaled $912 thousand. There were no charge-offs that resulted from the TDRs
during the year ended December 31, 2016.
The following table presents the number and recorded investment of TDRs that were modified within the previous 12 months
which have defaulted (defined as past due 90 days or more) during the year ended December 31, 2016:
(in thousands)
Type of modification:
Residential real estate ...................................................................................................
Commercial real estate .................................................................................................
Construction, land acquisition and development ..........................................................
Commercial and industrial ...........................................................................................
Consumer .....................................................................................................................
State and political subdivisions ....................................................................................
Total modifications ...................................................................................................
For the Year Ended
December 31, 2016
Number of
Contracts
Recorded
Investment
3 $
1
-
-
-
-
4 $
107
680
-
-
-
-
787
For impairment determination purposes, the three residential real estate TDRs that defaulted during the year ended December
31, 2016 were considered collateral-dependent loans. One of the three TDRs suffered a decline in collateral value, which
resulted in a charge against the ALLL of $37 thousand during the year ended December 31, 2016. The one commercial real
84
estate loan with a recorded investment of $680 thousand that defaulted during the year ended December 31, 2016, was
foreclosed upon and transferred to OREO during the third quarter of 2016.
There were no TDRs that were modified during the previous twelve months for which there was a payment default during
the years ended December 31, 2015 and 2014. There was one commercial real estate TDR with a recorded investment of $3.5
million that defaulted during the year ended December 31, 2015, however, the default did not occur within 12 months of the
original modification. This loan was subsequently foreclosed upon and transferred to OREO during the fourth quarter of
2015.
Residential Real Estate Loan Foreclosures
There were five and three consumer mortgage loans secured by residential real estate properties in the process of foreclosure
at December 31, 2016 and 2015, respectively. The consumer mortgage loans had aggregate recorded investments of $92
thousand at December 31, 2016 and $340 thousand at December 31, 2015. There was one residential real estate property with
a carrying value of $237 thousand that was foreclosed upon during the year ended December 31, 2016. There were two
residential real estate properties with an aggregate carrying value of $41 thousand included in OREO at both December 31,
2016 and 2015.
Note 6. BANK PREMISES AND EQUIPMENT
The following table summarizes bank premises and equipment at December 31, 2016 and 2015:
(in thousands)
Land ............................................................................................................................. $
Buildings and improvements ........................................................................................
Furniture, fixtures and equipment ................................................................................
Leasehold improvements ..............................................................................................
Total ..........................................................................................................................
Accumulated depreciation ............................................................................................
Net ............................................................................................................................ $
December 31,
2016
2015
2,757 $
7,676
12,299
5,184
27,916
(17,132)
10,784 $
2,731
7,406
12,674
5,007
27,818
(16,625)
11,193
Depreciation and amortization expense of premises and equipment amounted to $1.3 million, $1.2 million, and $1.3 million
for the years ended December 31, 2016, 2015 and 2014, respectively.
On January 24, 2014, FNCB sold the premises and certain equipment of its Marshalls Creek, Monroe County branch as part
of the Branch Purchase Agreement with ESSA Bank and Trust. The property sold had a net book value of $2.3 million, and
FNCB realized a gain on the sale of the property of $181 thousand, which is included in the $607 thousand gain on branch
divestitures in non-interest income for the year ended December 31, 2014.
Note 7. DEPOSITS
The following table summarizes deposits at December 31, 2016 and 2015:
(in thousands)
Demand (non-interest bearing) .................................................................................... $
Interest-bearing:
Interest-bearing demand ...........................................................................................
Savings .....................................................................................................................
Time ($250,000 and over) ........................................................................................
Other time .................................................................................................................
Total interest-bearing ................................................................................................
Total deposits ........................................................................................................ $
December 31,
2016
2015
173,702 $
154,531
551,114
103,241
35,917
151,165
841,437
1,015,139 $
364,303
92,890
30,290
179,532
667,015
821,546
85
The aggregate amount of deposits reclassified as loans was $80 thousand at December 31, 2016 and $69 thousand at
December 31, 2015. Management evaluates transaction accounts that are overdrawn for collectability as part of its evaluation
for credit losses. During 2016 and 2015, no deposits were received on terms other than those available in the normal course
of business.
The following table summarizes scheduled maturities of time deposits, including certificates of deposit and individual
retirement accounts, at December 31, 2016:
Time Deposits
(in thousands)
2017 .................................................................................. $
2018 ..................................................................................
2019 ..................................................................................
2020 ..................................................................................
2021 ..................................................................................
2022 and thereafter ...........................................................
Total .............................................................................. $
$250,000
and Over
Other
Time Deposits
Total
25,137 $
7,015
3,111
254
400
-
35,917 $
99,187 $
30,559
6,856
8,068
6,445
50
151,165 $
124,324
37,574
9,967
8,322
6,845
50
187,082
Investment securities with a carrying value of $271.3 million and $252.4 million at December 31, 2016 and 2015,
respectively, were pledged to collateralize certain municipal deposits. In addition, FNCB had outstanding letters of credit
with the FHLB to secure municipal deposits of $75.0 million at December 31, 2016. There were no outstanding letters of
credit with the FHLB to secure municipal deposits at December 31, 2015.
Note 8. BORROWED FUNDS
The following table summarizes the components of borrowed funds at December 31, 2016 and 2015:
(in thousands)
Federal Home Loan Bank of Pittsburgh advances - overnight ..................................... $
Federal Home Loan Bank of Pittsburgh advances - term .............................................
Subordinated debentures ..............................................................................................
Junior subordinated debentures ....................................................................................
Total .......................................................................................................................... $
December 31,
2016
2015
- $
58,537
10,000
10,310
78,847 $
60,500
75,302
14,000
10,310
160,112
Short-term borrowings available to FNCB include overnight FHLB of Pittsburgh advances, federal funds purchased and the
Federal Reserve Discount Window, which generally represent overnight or less than 30-day borrowings. FNCB’s maximum
borrowing capacity under federal funds lines of credit and the Federal Reserve Discount Window was $20.0 million and
$14.4 million, respectively at December 31, 2016. Federal funds lines of credit are unsecured, while any borrowings through
the Federal Reserve Discount Window are fully collateralized by certain pledged loans in the amount of $25.9 million at
December 31, 2016.
FNCB has an agreement with the FHLB of Pittsburgh which allows for borrowings, either overnight or term, up to its
maximum borrowing capacity, which is based on a percentage of qualifying loans pledged under a blanket pledge agreement.
Loans of $427.8 million and $377.5 million, at December 31, 2016 and 2015, respectively, were pledged to collateralize
borrowings under this agreement. FNCB’s maximum borrowing capacity was $298.1 million at December 31, 2016, of which
$58.5 million in fixed-rate advances having original maturities between nine months and fifteen years, as well as $75.0
million in letters of credit to secure municipal deposits, were outstanding. In addition to pledging loans, FNCB is required to
purchase FHLB of Pittsburgh stock based upon the amount of advances and letters of credit outstanding.
The maximum amount of borrowings outstanding at any month end during the years ended December 31, 2016 and 2015
was $145.1 million and $160.1 million, respectively.
On December 14, 2006, the Issuing Trust issued $10.0 million of trust preferred securities (the “Trust Securities”) at a variable
interest rate of 7.02%, with a scheduled maturity of December 15, 2036. FNCB owns 100.0% of the ownership interest in
the Trust. The proceeds from the issue were invested in $10.3 million, 7.02% Junior Subordinated Debentures (the
“Debentures”) issued by FNCB. The interest rate on the Trust Securities and the Debentures resets quarterly at a spread of
1.67% above the current 3-month LIBOR rate. The average interest rate paid on the Debentures was 2.35% in 2016, 1.99%
86
in 2015, and 1.93% in 2014. The Debentures are unsecured and rank subordinate and junior in right to all indebtedness,
liabilities and obligations of FNCB. The Debentures represent the sole assets of the Trust. Interest on the Trust Securities is
deferrable until a period of twenty consecutive quarters has elapsed. FNCB had the option to prepay the Trust Securities
beginning December 15, 2011. FNCB has, under the terms of the Debentures and the related Indenture, as well as the other
operative corporate documents, agreed to irrevocably and unconditionally guarantee the Trust’s obligations under the
Debentures. FNCB has reflected this investment on a deconsolidated basis. As a result, the Debentures totaling $10.3 million,
have been reflected in borrowed funds in the consolidated statements of financial condition at December 31, 2016 and 2015
under the caption “Junior Subordinated Debentures”. FNCB records interest expense on the Debentures in its consolidated
statements of income. FNCB also records its common stock investment issued by First National Community Statutory Trust
I in other assets in its consolidated statements of financial condition at December 31, 2016 and 2015.
FNCB was released from a Written Agreement with the Federal Reserve Bank on September 2, 2015. While FNCB was
under the Written Agreement, principal and interest payments on the Debentures required written non-objection from the
Reserve Bank. Pursuant to the Written Agreement, FNCB had been deferring the quarterly interest payments on the
Debentures beginning September 14, 2010 and ending on December 15, 2014. During 2014, FNCB requested and received
non-objection from the Reserve Bank to make a distribution on the Debentures to cure the interest deferral on December 15,
2014, at which time FNCB paid all deferred and currently payable accrued interest totaling $884 thousand. Since that date,
FNCB has continued to make regularly scheduled quarterly interest payments due on the Debentures. At December 31, 2016
and 2015, accrued and unpaid interest associated with the Debentures amounted to $13 thousand and $11 thousand,
respectively.
On September 1, 2009, FNCB offered only to accredited investors up to $25.0 million principal amount of unsecured
subordinated debentures due September 1, 2019 (the “Notes”). Prior to July 1, 2015, the Notes had a fixed interest rate of 9%
per annum. Payments of interest are payable to registered holders of the Notes (the “Noteholders”) quarterly on the first of
every third month, subject to the right of FNCB to defer such payment. On June 30, 2015, pursuant to approval from all of
the Noteholders and the Reserve Bank, FNCB amended the original terms of the Notes to reduce the interest rate payable
from 9.00% to 4.50% effective July 1, 2015 and to accelerate a partial repayment of principal amount under the Notes.
Pursuant to the approved amendment, on June 30, 2015, FNCB repaid 44% of the original principal amount, or $11.0 million,
of the Notes outstanding to the holders on June 30, 2015, with the remaining $14.0 million in principal to be repaid as follows:
(a) 16% of the original principal amount, or $4.0 million, payable on September 1, 2017; (b) 20% of the original principal
amounts, or $5.0 million, payable on September 1, 2018; and (c) the final 20% of the original principal amount, or $5.0
million, payable on September 1, 2019, the maturity date of the Notes. On October 28, 2016, the Board of Directors of FNCB
approved the acceleration of a $4.0 million partial repayment of principal on the Notes. The $4.0 million principal repayment,
which was due and payable on September 1, 2017, was paid to Noteholders on December 1, 2016. The principal balance
outstanding for these Notes was $10.0 million at December 31, 2016 and $14.0 million at December 31, 2015.
While FNCB was under the Written Agreement, principal and interest payments on the Notes required written non-objection
from the Reserve Bank. Pursuant to the Written Agreement, FNCB had been deferring the quarterly interest payments on the
Notes beginning December 1, 2010 and ending on June 1, 2015. Beginning with the September 1, 2015 payment, FNCB
resumed the regularly scheduled quarterly interest payments and since that date has continued to make the scheduled interest
payments going forward. Additionally, on January 27, 2016, the Board of Directors authorized payment on March 1, 2016
of all interest that FNCB had previously been deferring on the Notes. The aggregate payment, totaling $11.0 million, included
all deferred interest and interest due and payable on March 1, 2016. Since that date, FNCB has continued to make regularly
scheduled quarterly interest payments due on the Notes. The accrued and unpaid interest associated with the Notes amounted
to $39 thousand and $10.9 million at December 31, 2016 and 2015, respectively.
The following table presents borrowed funds and the weighted-average interest rate by maturity date at December 31, 2016:
(in thousands)
Within one year ........................................................................................................... $
After one year but within two years ............................................................................
After two years but within three years ........................................................................
After three years but within four years ........................................................................
After four years but within five years .........................................................................
After five years ............................................................................................................
Total ......................................................................................................................... $
87
December 31, 2016
Weighted
Average
Interest Rate
Amount
47,553
10,000
10,984
-
-
10,310
78,847
0.68%
2.77%
3.26%
-
-
2.39%
1.53%
Note 9. BENEFIT PLANS
The Bank has a defined contribution profit sharing plan (“Profit Sharing Plan”) which includes the provision under section
401(k) of the Internal Revenue Code (“401(k)”) and covers all eligible employees. The Bank’s contribution to the plan is
determined at management’s discretion at the end of each year and funded. The 401(k) feature of the plan permits employees
to make voluntary salary deferrals, either pre-tax or Roth, up to the dollar limit prescribed by law. FNCB may make
discretionary matching contributions equal to a uniform percentage of employee salary deferrals. Discretionary matching
contributions are determined each year by management and approved by the Board of Directors. There were no discretionary
annual contributions made to the profit sharing plan in 2016, 2015 and 2014. Discretionary matching contributions under the
401(k) feature of the plan totaled $168 thousand, $149 thousand, and $134 thousand in 2016, 2015 and 2014, respectively.
The Bank has an unfunded non-qualified deferred compensation plan covering all eligible Bank officers and directors as
defined by the plan. This plan permits eligible participants to elect to defer a portion of their compensation. Elective deferred
compensation and accrued earnings, included in other liabilities in the accompanying consolidated statements of financial
condition, aggregated $3.1 million at both December 31, 2016 and 2015.
On October 1, 2015, the Bank executed a Supplemental Executive Retirement Plan (“SERP”) for a select group of
management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of The
Employee Retirement Income Security Act of 1974. The general provisions of the SERP provide for annual year-end
contributions, performance contingent contributions and discretionary contributions. The SERP contributions are unfunded
for Federal tax purposes and constitute an unsecured promise by the Bank to pay benefits in the future and are included in
other liabilities in the accompanying consolidated statements of financial condition. Participants in the SERP shall have the
status of general unsecured creditors of the Bank. SERP contributions totaled $147 thousand in 2016 and $130 thousand in
2015. The total liability associated with the SERP was $277 thousand at December 31, 2016 and $130 thousand at December
31, 2015.
Note 10. INCOME TAXES
The following table summarizes the current and deferred amounts of the provision for income tax expense (benefit) and the
change in valuation allowance for each of the three years ended December 31, 2016, 2015 and 2014:
(in thousands)
Current ......................................................................................... $
Deferred .......................................................................................
Change in valuation allowance.....................................................
Income tax expense (benefit) .................................................... $
For the Year Ended December 31,
2015
2016
2014
134 $
1,968
(355)
1,747 $
(75) $
2,297
(29,981)
(27,759) $
326
3,799
(3,799 )
326
The following table presents a reconciliation between the effective income tax expense (benefit) and the income tax expense
that would have been provided at the federal statutory tax rate of 34.0% for each of the years ended December 31, 2016, 2015
and 2014:
For the Year Ended December 31,
2015
2016
2014
2,739 $
2,748 $
4,674
(481)
9
(187)
(355)
-
22
1,747 $
(483)
11
(192)
(29,981)
-
138
(27,759) $
(1,087 )
21
(221 )
(3,799 )
570
168
326
(in thousands)
Provision at statutory tax rates ..................................................... $
Add (deduct):
Tax effects of non-taxable income ...............................................
Non-deductible interest expense ..................................................
Bank-owned life insurance ...........................................................
Change in valuation allowance ....................................................
Regulatory penalties .....................................................................
Other items, net ............................................................................
Income tax expense (benefit) ....................................................... $
88
The following table summarizes the components of the net deferred tax asset included in other assets at December 31, 2016
and 2015:
(in thousands)
Allowance for loan and lease losses ............................................................................. $
Deferred compensation ................................................................................................
Unrealized holding losses on securities available-for-sale ...........................................
Other real estate owned valuation ................................................................................
Deferred intangible assets ............................................................................................
Employee benefits ........................................................................................................
Accrued interest ...........................................................................................................
AMT tax credits ...........................................................................................................
Charitable contribution carryover ................................................................................
Accrued rent expense ...................................................................................................
Accrued vacation ..........................................................................................................
Accrued legal settlement costs .....................................................................................
Deferred income ...........................................................................................................
Net operating loss carryover ........................................................................................
Gross deferred tax assets .......................................................................................
Deferred loan origination costs ....................................................................................
Accrued interest ...........................................................................................................
Prepaid expenses ..........................................................................................................
Depreciation .................................................................................................................
Gross deferred tax liabilities .................................................................................
Net deferred asset before valuation allowance ......................................................
Valuation allowance .....................................................................................................
Net deferred tax assets .......................................................................................... $
December 31,
2016
2015
2,961 $
1,242
919
233
997
272
-
2,600
235
157
55
941
81
17,123
27,816
(551)
(193)
(74)
(8)
(826)
26,990
-
26,990 $
3,105
1,171
123
265
1,189
258
199
2,466
355
217
83
923
96
18,910
29,360
(1,074)
-
(73)
(51)
(1,198)
28,162
(355)
27,807
As of December 31, 2016, FNCB had $50.4 million of net operating loss carryovers resulting in deferred tax assets of $17.1
million. Beginning in 2030, these net operating loss carryovers will expire if not utilized. As of December 31, 2016, FNCB
also had $690 thousand of charitable contribution carryovers resulting in gross deferred tax assets of $235 thousand. These
charitable contribution carryovers will begin to expire after December 31, 2017 if not utilized. In addition, FNCB had
alternative minimum tax (“AMT”) credit carryovers of $2.6 million as of December 31, 2016 that have an indefinite life. As
of December 31, 2015, FNCB had carryovers for NOLs, charitable contributions and AMT credits of $55.6 million, $1.0
million and $2.5 million, respectively.
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. If management determines based on available evidence, both positive and negative,
that it is more likely than not that some portion or all of the deferred tax asset will not be realized in future periods, a valuation
allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s
estimates and judgments used in their evaluation of both positive and negative evidence.
In evaluating available evidence, management considers, among other factors, historical financial performance, expectation
of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods,
experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of
reversals of temporary differences. In assessing the need for a valuation allowance, management carefully weighs both
positive and negative evidence currently available. Based on the analysis of all available positive and negative evidence,
management determined that negative evidence existed at December 31, 2014 that outweighed any positive evidence that
existed at that time. Accordingly, management had established a valuation allowance equal to 100.0% of net deferred tax
assets, excluding deferred tax assets or liabilities related to unrealized holding gains and losses on available-for-sale
securities.
Management performed an evaluation of FNCB’s deferred tax assets at December 31, 2015 and determined that based on its
consistent methodology the negative evidence that was present at December 31, 2014 no longer existed. FNCB’s core
earnings had normalized and it was now in a cumulative three-year income position, which management deemed to be
89
positive evidence. In addition, management believed that FNCB’s projected future earnings were sufficient to be able to
utilize its available net operating loss (NOL) carryforwards prior to their expiration.
This analysis supported the reversal of the valuation allowance established for deferred tax assets at December 31, 2015
except for the valuation allowance established for charitable contribution carryforwards. At December 31, 2015, FNCB had
$1.0 million in contribution carryforwards available. Unlike the expiration period for net operating loss carryforwards
(generally 20 years) and AMT credit carryovers (indefinite), the expiration of an excess charitable contribution carryover
occurs after the 5th succeeding tax year for which a charitable contribution is made. Management did not believe that enough
positive evidence existed to support the utilization of charitable contribution carryforwards in entirety before expiration at
December 31, 2015. Accordingly, management believed a valuation allowance in the amount of $355 thousand was
appropriate strictly in the case of the excess charitable contribution carryover deferred tax asset at December 31, 2015.
At December 31, 2016, management performed an evaluation of FNCB’s deferred tax assets taking into consideration both
positive and negative evidence that existed as of that date. In addition, management assessed the continued need for a
valuation allowance related to its contribution carryovers. Management anticipates that, based on its current tax provision,
FNCB will have generated enough taxable income in 2016 to utilize $353 thousand of the $1.0 million in available charitable
contribution carryforwards. At December 31, 2016, management believes that FNCB will be able to generate future taxable
income sufficient to utilize its deferred tax assets including the remaining contribution carryforwards in full prior to their
expiration in 2020. In addition, management believes that future taxable income will be sufficient to utilize deferred tax
assets. FNCB’s core earnings in 2016 were strong and its projected future core earnings will continue to support the
recognition of the deferred tax assets based on future growth projections. Accordingly, management concluded that no
valuation allowance was required at December 31, 2016.
Note 11. RELATED PARTY TRANSACTIONS
In conducting its business, FNCB has engaged in, and intends to continue to engage in, banking and financial transactions
with its 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
participations sold, as well as repayments during the years ended December 31, 2016 and 2015:
(in thousands)
Balance January 1, ....................................................................................................... $
Additions, new loans and advances ..........................................................................
Repayments ..............................................................................................................
Other (1) ...................................................................................................................
Balance December 31,.................................................................................................. $
2016
2015
52,652 $
24,917
(35,513)
(49)
42,007 $
36,783
65,411
(48,852)
(690)
52,652
For the Year Ended December 31,
(1) Other represents loans to related parties that ceased being related parties during the year
There was one loan relationship aggregating $381 thousand to a business partially owned by a director that was classified as
“Special Mention” at December 31, 2016. To date, FNCB has received all contractual principal and interest payments in a
timely manner and each of the individual loans in this relationship were current as of December 31, 2016. Management has
classified the loan relationship as special mention strictly because FNCB has not received current financial information from
a non-related party to the loan agreements. Except for this loan relationship, there were no loans to directors, officers and
their related parties that were categorized as criticized loans within the Bank’s risk rating system, meaning they are not
considered to present a higher risk of collection than other loans.
Previously included in related party loans was a commercial line of credit with a company owned by a director that was paid
off during the year ended December 31, 2016. The aggregate balance outstanding for this loan was $11.0 million at December
31, 2015. FNCB had sold a participation interest in this line to the same director in the amount of $5.2 million, of which $4.4
million was outstanding at December 31, 2015. FNCB had received a 25 basis point servicing fee from this director on the
participation balance.
90
Deposits from directors, executive officers and their related parties held by the Bank at December 31, 2016 and 2015
amounted to $119.3 million and $106.1 million, respectively. Interest paid on the deposits amounted to $196 thousand, $276
thousand, and $97 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
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, and repair of repossessed automobiles for resale. FNCB recorded payments to related parties for
goods and services of $2.6 million, $2.1 million, and $2.7 million in 2016, 2015, and 2014, respectively.
The Notes held by directors and/or their related parties totaled $6.2 million at December 31, 2016 and $8.6 million at
December 31, 2015. On June 12, 2015, FNCB solicited consent from all existing Noteholders to amend the Notes by reducing
the interest rate payable on the Notes from 9.00% to 4.50% effective July 1, 2015, and prepaying 44% of the principal amount
outstanding on June 30, 2015. A group of Noteholders holding $14.0 million of the principal balance outstanding on the
Notes at June 12, 2015, comprised of both related parties or their interests and non-related parties, offered to purchase the
Notes of any Noteholder who did not wish to consent to the amendments. There were seven, non-related party Noteholders,
who elected to have their Notes purchased by the group, for a total principal balance of $10.0 million. Of the $10.0 million,
$6.4 million was purchased by related parties or their interests. On June 30, 2015, FNCB made an $11.0 million principal
reduction on the Notes. Total principal payments on Notes held by directors and/or their related parties totaled $6.8 million,
of which $6.4 million was used to purchase the Notes referenced above. On December 1, 2016, FNCB accelerated a $4.0
million principal repayment, which was due and payable on September 1, 2017, of which $2.5 million was paid to directors
and/or their related interests.
The following table summarizes the activity related to FNCB’s subordinated debt for the years ended December 31, 2016
and 2015:
For the Year Ended
December 31, 2016
For the Year Ended
December 31, 2015
Related
Party
Subordinated
Noteholders
Other
Subordinated
Noteholders
Total
Subordinated
Notes
Outstanding
Related
Party
Subordinated
Noteholders
Other
Subordinated
Noteholders
Total
Subordinated
Notes
Outstanding
(in thousands)
Balance, beginning of
period ............................... $
Assignments ...................
Principal reductions ........
Balance, end of period ........ $
8,640 $
-
(2,469)
6,171 $
5,360 $
-
(1,531)
3,829 $
14,000 $
-
(4,000)
10,000 $
9,000 $
6,429
(6,789)
8,640 $
16,000 $
(6,429 )
(4,211 )
5,360 $
25,000
-
(11,000)
14,000
On March 1, 2016, FNCB paid all previously deferred and accrued interest on the Notes for the period September 1, 2010
through May 31, 2015, which totaled $10.8 million. Included in the total paid was $3.9 million which was paid to FNCB’s
directors and/or their related parties. Regular quarterly interest payments on the Notes paid by FNCB to its directors and/or
their related parties totaled $395 thousand in 2016 and $233 thousand in 2015. Interest expense recorded on the Notes for
directors and/or their related parties amounted to $386 thousand and $606 thousand for the years ended December 31, 2016
and 2015, respectively. Interest accrued and unpaid on the Notes to directors and/or their related parties totaled $24 thousand
at December 31, 2016 and $3.9 million at December 31, 2015.
91
Note 12. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Leases
At December 31, 2016, FNCB was obligated under certain non-cancelable leases with initial or remaining terms of one year
or more. Minimum future obligations under non-cancelable leases in effect at December 31, 2016 are as follows:
(in thousands)
2017 .................................................................................................... $
2018 ....................................................................................................
2019 ....................................................................................................
2020 ....................................................................................................
2021 ....................................................................................................
2022 and thereafter .............................................................................
Total ................................................................................................ $
Minimum Future Lease Payments
December 31, 2016
Equipment
Total
Facilities
519 $
220
136
111
89
206
1,281 $
41 $
28
27
5
-
-
101 $
560
248
163
116
89
206
1,382
Total rental expense under leases amounted to $456 thousand, $795 thousand and $660 thousand in 2016, 2015 and 2014,
respectively.
Financial Instruments with off-balance sheet commitments
FNCB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that
involve varying degrees of credit, interest rate or liquidity risk in excess of the amount recognized in the balance sheet.
FNCB’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to
extend credit and standby letters of credit is represented by the contractual amount of those instruments.
Financial instruments whose contract amounts represent credit risk at December 31, 2016 and 2015 are as follows:
(in thousands)
Commitments to extend credit .................................................................................. $
Standby letters of credit .............................................................................................
December 31,
2016
2015
150,111 $
21,220
170,465
22,092
In order to provide for probable losses inherent in these instruments, FNCB recorded reserves for unfunded commitments of
$249 thousand and $300 thousand at December 31, 2016 and 2015, respectively, which were included in other liabilities on
the consolidated balance sheets.
Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These
commitments usually are for specific periods or contain termination clauses and may require the payment of a fee. The total
amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire
without being drawn upon.
Letters of credit and financial guarantees are agreements whereby FNCB guarantees the performance of a customer to a third
party. Collateral may be required to support letters of credit in accordance with management’s evaluation of the
creditworthiness of each customer. The credit exposure assumed in issuing letters of credit is essentially equal to that in other
lending activities.
Federal Home Loan Bank — Mortgage Partnership Finance Program
Under a secondary market loan servicing program with the FHLB, FNCB, in exchange for a monthly fee, provides a credit
enhancement guarantee to the FHLB for foreclosure losses in excess of 1% of original loan principal sold to the FHLB. At
December 31, 2016, FNCB serviced payments on $7.6 million of first lien residential loan principal under these terms for the
FHLB. At December 31, 2016, the maximum obligation for such guarantees by FNCB would be approximately $325
thousand if total foreclosure losses on the entire pool of loans exceed approximately $60 thousand. There was no reserve
established for this guarantee at December 31, 2016 and 2015.
92
Concentrations of Credit Risk
Cash Concentrations: The Bank maintains cash balances at several correspondent banks. There were no due from bank
accounts in excess of the $250 thousand limit covered by the Federal Deposit Insurance Corporation (“FDIC”) at December
31, 2016 or December 31, 2015.
Loan Concentrations: FNCB attempts to limit its exposure to concentrations of credit risk by diversifying its loan portfolio
and closely monitoring any concentrations of credit risk. The commercial real estate and construction, land acquisition and
development portfolios comprise $262.2 million, or 35.8% of gross loans at December 31, 2016. Geographic concentrations
exist because FNCB provides its services in its primary market area of Northeastern Pennsylvania and conducts limited
activities outside of that area. FNCB had loans and loan commitments secured by real estate outside of its primary market
area of $25.7 million, or 3.5%, of gross loans at December 31, 2016.
FNCB considers an industry concentration within the loan portfolio to exist if the aggregate loan balance outstanding for that
industry exceeds 25.0% of capital. The following table summarizes the concentrations within FNCB’s loan portfolio by
industry at December 31, 2016 and 2015:
(in thousands)
Retail space/shopping centers ...................................................... $
Automobile dealers ......................................................................
1-4 family residential investment properties ................................
December 31, 2016
% of
Gross
Loans
Amount
December 31, 2015
% of
Gross
Loans
Amount
38,573
31,989
24,413
5.27% $
4.37%
3.34%
35,292
34,594
18,957
4.83 %
4.73 %
2.59 %
Litigation
On May 24, 2012, a putative shareholder filed a complaint in the Court of Common Pleas for Lackawanna County
(“Shareholder Derivative Suit”) against certain present and former directors and officers of FNCB (the “Individual
Defendants”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste, and unjust enrichment. FNCB
was named as a nominal defendant. The parties to the Shareholder Derivative Suit commenced settlement discussions and on
December 18, 2013, the Court entered an Order Granting Preliminary Approval of Proposed Settlement subject to notice to
shareholders. On February 4, 2014, the Court issued a Final Order and Judgment for the matter granting approval of a
Stipulation of Settlement (the “Settlement”) and dismissing all claims against FNCB and the Individual Defendants. As part
of the Settlement, there was no admission of liability by the Individual Defendants. Pursuant to the Settlement, the Individual
Defendants, without admitting any fault, wrongdoing or liability, agreed to settle the derivative litigation for $5.0 million.
The $5.0 million Settlement payment was made to FNCB on March 28, 2014. The Individual Defendants reserved their rights
to indemnification under FNCB’s Articles of Incorporation and Bylaws, resolutions adopted by the Board, the Pennsylvania
Business Corporation Law and any and all rights they have against FNCB’s and the Bank’s insurance carriers. In addition,
in conjunction with the Settlement, FNCB accrued $2.5 million related to fees and costs of the plaintiff’s attorneys, which
was included in non-interest expense in the consolidated statements of income for the year ended December 31, 2013. On
April 1, 2014, FNCB paid the $2.5 million related to fees and costs of the plaintiff’s attorneys and partial indemnification of
the Individual Defendants in the amount of $2.5 million, and as such, as of December 31, 2016, $2.5 million plus accrued
interest remains accrued in other liabilities related to the potential indemnification of the Individual Defendants.
On September 5, 2012, Fidelity and Deposit Company of Maryland (“F&D”) filed an action against FNCB and the Bank, as
well as several current and former officers and directors of FNCB, in the United States District Court for the Middle District
of Pennsylvania. F&D has asserted a claim for the rescission of a directors’ and officers’ insurance policy and a bond that it
had issued to FNCB. On November 9, 2012, FNCB and the Bank answered the claim and asserted counterclaims for the
losses and expenses already incurred by FNCB and the Bank. FNCB and the other defendants are defending the claims and
have opposed F&D’s requested relief by way of counterclaims, breaches of contract and bad faith claims against F&D for its
failure to fulfill its obligations to FNCB and the Bank under the insurance policy. The discovery stage is completed and the
parties have exchanged expert reports. As of the date of this report, the litigation is in the dispositive motion stage. At this
time FNCB cannot reasonably determine the outcome or potential range of loss, if any, in connection with this matter.
On February 16, 2017, FNCB and the Bank entered into a Class Action Settlement Agreement and Release (the “Settlement
Agreement”) in the matters filed in the Court of Common Pleas of Lackawanna County to Steven Antonik, Individually, and
as Administrator of the Estate of Linda Kluska, William R. Howells and Louise A. Howells, Summer Benjamin, and Joshua
Silfee, on behalf of themselves and all others similarly situated vs. First National Community Bancorp, Inc. and First National
93
Community Bank, Civil Action No. 2013-CV-4438 and Charles Saxe, III, Individually and on behalf of all others similarly
situated vs. First National Community Bank No. 2013-CV-5071 (collectively, the “Actions”). By entering into this Settlement
Agreement, the parties to the Actions have resolved the claims made in the complaints to their mutual satisfaction. FNCB
has not admitted to the validity of any claims or allegations and deny any liability in the claims made and the Plaintiffs have
not admitted that any claims or allegations lack merit or foundation. Under the terms of the Settlement Agreement, the parties
have agreed to the following: 1) FNCB is to pay the Plaintiffs’ class members the aggregate sum of Seven Hundred Fifty
Thousand ($750,000)(an amount which FNCB recorded as a liability and corresponding expense in its 2015 operating
results); 2) Plaintiffs shall release all claims against FNCB related to the Actions; 3) FNCB shall move to vacate or satisfy
any judgments against any class members arising from the vehicle loans that are the subject of the Actions; 4) FNCB shall
waive the deficiency balance of each class member and remove the trade lines on each class members’ credit report associated
with the subject vehicle loans that are at issue in the Actions for Experian, Equifax and Transunion. The Settlement
Agreement provides for an Incentive Award for the representative Plaintiffs and an award to Plaintiffs’ counsel of attorney’s
fees and reimbursement of expenses in connection with their roles in these Actions, subject to Court Approval. The Settlement
Agreement remains subject to approval by the Court after notice to the class members and a final settlement hearing. The
hearing on the terms of the proposed Settlement Agreement will be to determine whether 1) the terms and conditions of the
settlement provided for in the Settlement Agreement are fair, reasonable and adequate and in the best interests of the class
members; 2) the judgment dismissing the claims of the class members, as provided for in the Settlement Agreement, shall be
entered, and 3) the request of the representative Plaintiffs for the Incentive Award and the Plaintiffs’ counsel for an award
for attorney’s fees and reimbursement of expenses shall be granted. As previously mentioned above and in connection with
the primary terms of the tentative settlement agreement entered by Order of Court on December 17, 2015, FNCB recorded a
liability and corresponding expense in the amount of Seven Hundred Fifty Thousand ($750,000), which was included in
FNCB’s 2015 operating results.
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 13. STOCK COMPENSATION PLANS/SUBSEQUENT EVENT
FNCB had an Employee Stock Incentive Plan (the “Stock Incentive Plan”), where stock options were granted to key officers
and other employees of FNCB. The aggregate number of shares authorized to be issued upon exercise of the options under
the Stock Incentive Plan could not exceed 1,100,000 shares. Options and rights granted under the Stock Incentive Plan became
exercisable six months after the date the options were awarded and expire ten years after the award date. Upon exercise, the
shares are issued from FNCB’s authorized but unissued stock. The Stock Incentive Plan expired on August 30, 2010.
Accordingly, no further grants will be made under the Stock Incentive Plan. There was no compensation expense related to
options under the Stock Incentive Plan required to be recorded in each of the years ended December 31, 2016, 2015, and
2014.
94
The following table summarizes the status of FNCB’s Stock Incentive Plan:
2016
For the Years Ended December 31,
2015
2014
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Stock options outstanding at the
beginning of the year ..................
Granted ..........................................
Exercised .......................................
Forfeited ........................................
Stock options outstanding at the
end of the year ............................
Options exercisable at year end .....
Weighted average fair value of
options granted during the year ...
Stock-based compensation
expense .......................................
50,746 $
-
-
(13,046)
15.20
-
-
21.14
64,479 $
-
-
(13,733)
15.87
-
-
18.33
82,598 $
-
-
(18,119)
37,700 $
37,700 $
13.15
13.15
50,746 $
50,746 $
15.20
15.20
64,479 $
64,479 $
$
$
-
-
$
$
-
-
$
$
15.98
-
-
16.37
15.87
15.87
-
-
At December 31, 2016, 2015 and 2014 the exercisable options had no total intrinsic value and there was no unrecognized
compensation expense.
The following table presents information pertaining to options outstanding at December 31, 2016:
Options Outstanding
Options Excercisable
Range of Exercise Price
$10.81 - $16.90 ...........................
Number
Outstanding
37,700
Weighted
Average
Remaining Average
Contractual Exercise
Weighted
Life
Price
Number
Exercisable
Weighted
Average
Exercise
Price
1.57 $
13.15
37,700 $
13.15
On October 29, 2014, the Board of Directors adopted a 2014 Employee Stock Grant Plan (the “2014 Stock Grant Plan”)
under which shares of common stock not to exceed 13,500 were authorized to be granted to employees. On December 1,
2014, FNCB granted 50 shares of its common stock to each active full and part time employee. There were 12,850 shares
granted under the 2014 Stock Grant Plan at a fair value of $6.02 per share.
On November 25, 2015, the Board of Directors adopted a 2015 Employee Stock Grant Plan (the “2015 Stock Grant Plan”)
under which shares of common stock not to exceed 13,550 were authorized to be granted to employees. On November 25,
2015, FNCB granted 50 shares of its common stock to each active full and part time employee. There were 13,300 shares
granted under the 2015 Stock Grant Plan at a fair value of $5.15 per share.
The total cost of these grants, which was included in salary expense in the consolidated statements of income, amounted to
$68 thousand and $77 thousand for the years ended December 31, 2015 and 2014, respectively. No additional shares were
granted under these plans. There was no such plan adopted in 2016.
FNCB has a Long Term Incentive Compensation Plan (“LTIP”) for executives and certain key employees. The LTIP
authorizes up to 1,200,000 shares of common stock for issuance and provides the Board of Directors with the authority to
offer several different types of long-term incentives, including stock options, stock appreciation rights, restricted stock,
restricted stock units, performance units and performance shares. The Board of Directors approved initial awards under the
terms of the LTIP, which were granted to executives and certain key employees on March 1, 2014. The initial grant was
comprised solely of 45,750 shares of restricted stock. On March 1, 2015 and March 1, 2016, an additional 84,900 shares and
67,600 shares, respectively, of restricted stock were awarded under the LTIP. At December 31, 2016, there were 1,026,752
shares of common stock available for award under the LTIP. For the years ended December 31, 2016, 2015, and 2014, stock-
based compensation expense, which is included in salaries and benefits expense in the consolidated statements of income,
totaled $265 thousand, $247 thousand and $93 thousand, respectively. Total unrecognized compensation expense related to
95
unvested restricted stock awards at December 31, 2016, 2015, and 2014 was $396 thousand, $453 thousand and $214
thousand, respectively. On March 1, 2017, an additional 54,549 shares of restricted stock were awarded under the LTIP.
The following table summarizes the activity related to FNCB’s unvested restricted stock awards during the year ended
December 31, 2016.
2016
For the Years Ended December 31,
2015
2014
Weighted-
Average
Weighted-
Average
Restricted Grant Date Restricted Grant Date Restricted Grant Date
Fair Value
Shares
Weighted-
Average
Fair Value Shares
Fair Value Shares
Unvested unrestricted stock
awards at January 1, ....................
Awards granted .............................
Forfeitures .....................................
Vestings .........................................
Unvested unrestricted stock
112,958 $
67,600
(23,836)
(52,848)
5.99
5.53
5.69
6.02
45,750 $
84,900
(1,166)
(16,526)
6.70
5.75
6.70
6.70
- $
45,750
-
-
-
6.70
-
-
awards at December 31, ..............
103,874 $
5.74
112,958 $
5.99
45,750 $
6.70
Note 14. REGULATORY MATTERS/SUBSEQUENT EVENT
The Bank was under a Consent Order from the OCC dated September 1, 2010. On March 25, 2015, after meeting all of the
requirements of the Consent Order, the Bank was fully and completely released from the enforcement action. FNCB was
subject to a Written Agreement with the Federal Reserve Bank of Philadelphia (the “Reserve Bank”) dated November 24,
2010. On September 8, 2015, FNCB was notified by the Reserve Bank that effective September 2, 2015, it had been fully
and completely released from the Written Agreement.
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.
Furthermore, while under the Consent Order and Written Agreement, the Bank and FNCB were previously restricted from
paying any dividends without the prior approval of their respective regulators and accordingly, did not pay dividends from
2010 through 2015. Dividends declared and paid by FNCB during 2016 were $0.09 per share. On April 27, 2016, the Board
of Directors also approved the reinstatement of the Dividend Reinvestment and Stock Purchase Plan (“DRP”) which became
effective on June 1, 2016. Common shares issued under the DRP totaled 78,752 for the year ended December 31, 2016.
Subsequent to December 31, 2016, on January 25, 2017, FNCB declared a $0.03 per share dividend payable on March 15,
2017 to shareholders of record on March 1, 2017.
FNCB is 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, specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices must be met. Capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors.
In July 2013, the Federal Reserve, the OCC and the FDIC approved the final Basel III capital framework for U.S. banking
organizations (the “Regulatory Capital Rules”) implementing regulatory capital reforms and changes required by the Dodd-
Frank Act.
96
The Regulatory Capital Rules were effective on January 1, 2014; however, the mandatory compliance date for FNCB and
the Bank as “standardized approach” banking organizations began on January 1, 2015 and is subject to transitional provisions
extending to January 1, 2019. The Regulatory Capital Rules include new risk-based capital and leverage ratios and refine the
definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements
applicable to FNCB and the Bank under the Regulatory Capital Rules are:
●
●
●
●
a total capital ratio of 8.00% (unchanged from previous rules);
a Tier I risk-based capital ratio of 6.00% (increased from 4.00%);
a new common equity Tier I risk-based capital ratio of 4.50%; and
a Tier I capital to average assets (“Tier I leverage ratio”) of 4.00% for all institutions.
Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and
certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer
comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than
2.5% of total risk-weighted assets. The capital conservation buffer requirement began on January 1, 2016 at the 0.625% of
risk-weighted assets and will increase by that amount each year until fully phased in on January 1, 2019 at 2.50%.
The Regulatory Capital Rules also implement revisions and clarifications consistent with Basel III regarding the various
components of Tier I capital, including common equity, unrealized gains and losses, as well as certain instruments that will
no longer qualify as Tier I capital, some of which will be phased out over time. Implementation of the deductions and other
adjustments to common equity Tier I capital began on January 1, 2015, and will be phased-in over a four-year period
(beginning at 40% on January 1, 2015, 60% on January 1, 2016 and an additional 20% per year thereafter). FNCB and the
Bank were in full compliance with the additional capital conservation buffer requirement at December 31, 2016.
The Regulatory Capital Rules also revise the prompt corrective action framework, which is designed to place restrictions on
insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions
took effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital
conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in
order to qualify as “well capitalized”:
●
●
●
●
a total risk-based capital ratio of 10.00% (unchanged from current rules);
a Tier I risk-based capital ratio of 8.00% (increased from 6.00%);
a new common equity Tier I risk-based capital ratio of 6.50%; and
a Tier I leverage ratio of 5.00%.
The Regulatory Capital Rules set forth certain changes for the calculation of risk-weighted assets, which were required to be
utilized beginning January 1, 2015. The provisions applicable to banking organizations under the “standardized approach”
include changes with respect to risk weights for commercial real estate loans, past due exposures and conversion factors for
commitments with an original maturity of one year or less.
Current quantitative measures established by regulation to ensure capital adequacy require FNCB to maintain minimum
amounts and ratios (set forth in the table 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).
97
The following tables present summary information regarding FNCB’s and the Bank’s risk-based capital and related ratios at
December 31, 2016 and 2015:
(dollars in thousands)
December 31, 2016 ................................
Amount Ratio Amount Ratio Ratio
Company
Bank
Minimum
Required
For
Capital
Adequacy
Purposes
Minimum
Required For
Capital
Adequacy
Purposes with
Conservation
Buffer
Ratio
To Be Well
Capitalized
Under
Prompt
Corrective
Action
Regulations*
Ratio
Total capital (to risk-weighted assets) .... $
96,827 12.06% $ 102,786 12.81%
8.00%
8.625%
10.00 %
Tier I capital (to risk-weighted assets) ...
82,159 10.23%
94,118 11.73%
6.00%
6.625%
8.00 %
Tier I common equity (to risk-weighted
assets) ..................................................
80,049 9.97%
94,118 11.73%
4.50%
5.125%
Tier I capital (to average assets) .............
82,159 7.53%
94,118 8.63%
4.00%
4.000%
6.50 %
5.00 %
Total risk-weighted assets ......................
803,026
802,610
Total average assets ............................... 1,090,665
1,090,550
(dollars in thousands)
December 31, 2015 ................................
Amount Ratio Amount Ratio Ratio
Company
Bank
Minimum
Required
For
Capital
Adequacy
Purposes
Minimum
Required For
Capital
Adequacy
Purposes with
Conservation
Buffer
Ratio
To Be Well
Capitalized
Under
Prompt
Corrective
Action
Regulations*
Ratio
Total capital (to risk-weighted assets) .... $
93,835 11.79% $ 110,039 13.83%
8.00%
N/A
10.00 %
Tier I capital (to risk-weighted assets) ...
74,945 9.42%
100,949 12.69%
6.00%
N/A
8.00 %
Tier I common equity (to risk-weighted
assets) ..................................................
74,945 9.42%
100,949 12.69%
4.50%
Tier I capital (to average assets) .............
74,945 7.27%
100,949 9.79%
4.00%
N/A
N/A
6.50 %
5.00 %
Total risk-weighted assets ......................
795,887
795,490
Total average assets ............................... 1,031,426
1,030,828
* Applies to the Bank only.
Note 15. 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
98
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, and for estimating fair value of financial
instruments not recorded at fair value, is set forth below.
Cash, Short-term Investments, Accrued Interest Receivable and Accrued Interest Payable
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities
The estimated fair values of available-for-sale equity securities are determined by obtaining quoted prices on nationally
recognized exchanges (Level 1 inputs). The estimated fair values for obligations of U.S. government agencies, obligations of
state and political subdivisions, government-sponsored agency CMOs and residential mortgage-backed securities, corporate
debt securities, and negotiable certificates of deposit are obtained 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 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, among other things 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. Management 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 (Level 3 inputs), management evaluates the appropriateness and quality of each price. Management reviews 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 prepared by FNCB or obtained from third party providers utilizing assumptions similar to those incorporated by
market participants. FNCB did not own any securities for which fair value was determined using Level 3 inputs at December
31, 2016 or 2015.
99
Loans
Except for collateral-dependent impaired loans, fair values of loans are estimated by discounting the projected future cash
flows using market discount rates that reflect the credit, liquidity, and interest rate risk inherent in the loan. Projected future
cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.
The estimated fair value of collateral dependent impaired loans is based on the appraised loan value or other reasonable offers
less estimated costs to sell. FNCB does not record loans at fair value on a recurring basis. However from time to time, a loan
is considered impaired and an allowance for credit losses is established. The specific reserves for collateral dependent
impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of the collateral is
generally based on appraisals. In some cases, adjustments are made to the appraised values due to various factors including
age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral.
When significant adjustments are based on unobservable inputs, the resulting fair value measurement is categorized as a
Level 3 measurement.
Loans Held For Sale
Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.
Mortgage Servicing Rights
The fair value of mortgage servicing rights is estimated using a discounted cash flow model that applies current estimated
prepayments derived from the mortgage-backed securities market and utilizes a current market discount rate for observable
credit spreads. FNCB does not record mortgage servicing rights at fair value on a recurring basis.
Restricted Stock
Ownership in equity securities of FHLB of Pittsburgh and the FRB is restricted and there is no established market for their
resale. The carrying amount is a reasonable estimate of fair value. At December 31, 2016, restricted stock consisted entirely
of equity securities of the FHLB of Pittsburgh.
Deposits
The fair value of demand deposits, savings deposits, and certain money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposit is estimated based on discounted cash flows using
FHLB advance rates currently offered for similar remaining maturities.
Borrowed Funds
FNCB uses discounted cash flows using rates currently available for debt with similar terms and remaining maturities to
estimate fair value.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest
rates and the committed rates. The fair value of off-balance sheet commitments is insignificant and therefore not included in
the table for non-recurring assets and liabilities.
100
Assets Measured at Fair Value on a Recurring Basis
The following tables present the financial assets that are measured at fair value on a recurring basis at December 31, 2016
and 2015, and the fair value hierarchy of the respective valuation techniques utilized to determine the fair value:
(in thousands)
Available-for-sale securities:
Obligations of U.S. government agencies ..................... $
Obligations of state and political subdivisions ..............
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations – residential .....
Collateralized mortgage obligations – commercial ...
Residential mortgage-backed securities ....................
Corporate debt securities ...............................................
Negotiable certificates of deposit ..................................
Equity securities ............................................................
Total available-for-sale securities ................................ $
(in thousands)
Available-for-sale securities:
Obligations of U.S. government agencies ..................... $
Obligations of state and political subdivisions ..............
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations – residential .....
Collateralized mortgage obligations – commercial ...
Residential mortgage-backed securities ....................
Corporate debt securities ...............................................
Negotiable certificates of deposit ..................................
Equity securities ............................................................
Total available-for-sale securities ................................ $
Fair Value Measurements at December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Fair Value
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
12,188 $
117,873
18,084
99,350
20,576
453
3,216
936
272,676 $
- $
-
-
-
-
-
-
936
936 $
12,188 $
117,873
18,084
99,350
20,576
453
3,216
-
271,740 $
Fair Value Measurements at December 31, 2015
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Fair Value
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
44,043 $
75,407
22,269
89,423
18,098
423
3,162
948
253,773 $
- $
-
-
-
-
-
-
948
948 $
44,043 $
75,407
22,269
89,423
18,098
423
3,162
-
252,825 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
There were no transfers between levels within the fair value hierarchy during the years ended December 31, 2016 and 2015.
101
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 December 31, 2016 and
2015, and additional quantitative information about the valuation techniques and inputs utilized by FNCB to determine fair
value. All such assets and liabilities were measured using Level 3 inputs.
December 31, 2016
(in thousands)
Impaired loans - collateral
dependent ........................... $
Impaired loans - other ..........
Other real estate owned ........
(in thousands)
Impaired loans - collateral
dependent ........................... $
Impaired loans - other ..........
Other real estate owned ........
Recorded
Investment
Fair Value Measurement
Valuation
Allowance
Fair
Value
Valuation
Technique
Quantitative Information
Unobservable
Inputs
Value/
Range
482 $
3,247
1,949
68 $
234
-
414 Appraisal of collateral
Selling costs
3,013 Discounted cash flows Discount rate
Selling costs
1,949 Appraisal of collateral
10.0 %
3.0% - 7.5 %
10.0 %
December 31, 2015
Recorded
Investment
Fair Value Measurement
Valuation
Allowance
Fair
Value
Valuation
Technique
Quantitative Information
Unobservable
Inputs
Value/
Range
718 $
3,757
3,104
124 $
257
-
594 Appraisal of collateral
Selling costs
3,500 Discounted cash flows Discount rate
Selling costs
3,104 Appraisal of collateral
10.0 %
2.9% - 7.5%
10.0 %
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 make adjustments to 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 at December 31, 2016 and 2015.
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 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.
(in thousands)
Financial assets
December 31, 2016
December 31, 2015
Fair Value
Measurement
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Cash and short term investments ....................
$
Securities available for sale ............................ See previous table
FHLB and FRB Stock ....................................
Loans held for sale .........................................
Loans, net .......................................................
Accrued interest receivable ............................
Mortgage servicing rights ..............................
Level 2
Level 2
Level 3
Level 2
Level 3
Level 1
112,445 $
272,676
3,311
596
725,860
2,757
215
112,445 $
272,676
3,311
596
715,602
2,757
744
21,083 $
253,773
7,695
683
724,926
2,475
240
21,083
253,773
7,695
683
716,412
2,475
880
Financial liabilities
Deposits .........................................................
Borrowed funds ..............................................
Accrued interest payable ................................
Level 2
Level 2
Level 2
1,015,139
78,847
242
968,904
78,923
242
821,546
160,112
11,165
798,466
160,266
11,165
102
Note 16. EARNINGS PER SHARE
For FNCB, the numerator of both the basic and diluted earnings per common share is net income available to common
shareholders (which is equal to net income less dividends on preferred stock and related discount accretion). 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. Common share equivalents are outstanding stock options to purchase FNCB’s
common shares and unvested restricted stock.
The following table presents the calculation of both basic and diluted earnings per common share for the years ended
December 31, 2016, 2015 and 2014:
(in thousands, except share data)
Net income ......................................................................................... $
For the Year Ended December 31,
2015
2016
2014
6,309 $
35,840 $
13,420
Basic weighted-average number of common shares outstanding .......
Plus: common share equivalents ........................................................
Diluted weighted-average number of common shares outstanding ....
16,571,262
1,433
16,572,695
16,499,622
-
16,499,622
16,472,660
211
16,472,871
Income per common share:
Basic ............................................................................................... $
Diluted ............................................................................................ $
0.38 $
0.38 $
2.17 $
2.17 $
0.81
0.81
For each of the years ended December 31, 2016, 2015 and 2014, common share equivalents in the table above are related
entirely to the incremental shares of unvested restricted stock. Stock options of 37,700 shares, 50,746 shares, and 64,479
shares, respectively for the years ended December 31, 2016, 2015 and 2014 were excluded from common share equivalents.
The exercise prices of stock options exceeded the average market price of the FNCB’s common shares during the periods
presented. Similarly, the weighted-average stock price for FNCB’s common stock for the year ended December 31, 2016
exceeded the fair market value of the restricted stock at the date of grant, therefore, inclusion of these common share
equivalents would be anti-dilutive to the diluted earnings per common share calculation.
103
Note 17. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the reclassifications out of accumulated other comprehensive income (loss), which is
comprised entirely of unrealized gains and losses on available-for-sale securities, for each of the years ended December 31,
2016, 2015 and 2014:
For the year Ended December 31, 2016
(in thousands)
Available-for-sale securities:
Reclassification adjustment for net gains reclassified into net income .............................. $
Taxes .....................................................................................................................................
Net of tax amount ............................................................................................................ $
(in thousands)
Available-for-sale securities:
Reclassification adjustment for net gains reclassified into net income .............................. $
Taxes .....................................................................................................................................
Net of tax amount ............................................................................................................ $
(in thousands)
Available-for-sale securities:
Reclassification adjustment for net gains reclassified into net income .............................. $
Taxes .....................................................................................................................................
Net of tax amount ............................................................................................................ $
Amount Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
Affected Line Item
in the Consolidated
Statements of Income
(960)
326
(634)
Net gain on sale of securities
Income tax expense (benefit)
For the year Ended December 31, 2015
Amount Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
Affected Line Item
in the Consolidated
Statements of Income
(2,296)
781
(1,515)
Net gain on sale of securities
Income tax expense (benefit)
For the year Ended December 31, 2014
Amount Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
Affected Line Item
in the Consolidated
Statements of Income
(6,272)
2,132
(4,140)
Net gain on sale of securities
Income tax expense (benefit)
The following table summarizes the changes in accumulated other comprehensive (loss) income, net of tax for the years
ended December 31, 2016, 2015 and 2014:
For the Year Ended December 31,
2015
2016
2014
(238) $
(912)
(634)
(1,546)
(1,784) $
1,138 $
139
(1,515 )
(1,376 )
(238 ) $
(3,092 )
8,370
(4,140 )
4,230
1,138
(in thousands)
Balance, January 1, ............................................................................ $
Other comprehensive (loss) income before reclassifications .............
Amounts reclassified from accumulated other comprehensive (loss)
income .............................................................................................
Net other comprehensive (loss) income during the period .................
Balance, December 31, ....................................................................... $
104
Note 18. CONDENSED FINANCIAL INFORMATION — PARENT COMPANY ONLY
The following tables present condensed parent company only financial information:
Condensed Statements of Financial Condition
(in thousands)
Assets:
Cash .............................................................................................................................. $
Investment in statutory trust .........................................................................................
Investment in subsidiary (equity method) ....................................................................
Other assets ..................................................................................................................
Total assets ............................................................................................................... $
Liabilities and Shareholders’ Equity:
Subordinated debentures .............................................................................................. $
Junior subordinated debentures ....................................................................................
Accrued interest payable ..............................................................................................
Other liabilities .............................................................................................................
Total liabilities ..........................................................................................................
Shareholders’ equity .....................................................................................................
Total liabilities and shareholders’ equity .................................................................. $
December 31,
2016
2015
567 $
384
112,106
236
113,293 $
10,000 $
10,310
52
2,784
23,146
90,147
113,293 $
947
377
122,182
609
124,115
14,000
10,310
10,902
2,725
37,937
86,178
124,115
For the Year Ended December 31,
2015
2014
2016
16,000 $
7
-
16,007
625
247
182
115
1,169
14,838
-
14,838
(8,529)
6,309 $
12,500 $
6
-
12,506
1,450
206
168
114
1,938
10,568
-
10,568
25,272
35,840 $
1,000
6
275
1,281
2,281
236
128
276
2,921
(1,640 )
-
(1,640 )
15,060
13,420
Condensed Statements of Income
(in thousands)
Income:
Dividends from subsidiaries ............................................................... $
Income from trust ...............................................................................
Other income ......................................................................................
Total income ...................................................................................
Expense:
Interest on subordinated notes ............................................................
Interest on junior subordinated debt ...................................................
Other operating expenses ...................................................................
Other losses ........................................................................................
Total expenses ................................................................................
Income (loss) before income taxes .....................................................
Provision (credit) for income taxes ....................................................
Income (loss) before equity in undistributed net income of
subsidiary .........................................................................................
Equity in undistributed net income of subsidiary ...............................
Net income ......................................................................................... $
105
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
For the Year Ended December 31,
2015
2014
2016
Net income ................................................................................. $
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed loss (income) of subsidiary ....................
Equity in trust ..............................................................................
(Decrease) increase in accrued interest payable ..........................
Decrease (increase) in other assets ..............................................
Increase (decrease) in other liabilities .........................................
Net cash provided by operating activities ............................
Cash flows from financing activities:
Principal reduction on subordinated debentures .........................
Proceeds from issuance of common shares .................................
Cash dividends paid ....................................................................
Net cash used in financing activities ....................................
(Decrease) increase in cash ................................................................
Cash at beginning of year ...................................................................
Cash at end of year ............................................................................. $
6,309 $
35,840 $
13,420
8,529
(7)
(10,850)
639
59
4,679
(4,000)
433
(1,492)
(5,059)
(380)
947
567 $
(25,272 )
(6 )
999
(18 )
(58 )
11,485
(11,000 )
-
-
(11,000 )
485
462
947 $
(15,060 )
(6 )
1,596
-
258
208
-
-
-
-
208
254
462
Note 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2016
Quarter Ended
March 31,
(in thousands, except share data)
Interest income ....................................................................... $
Interest expense ......................................................................
Net interest income ............................................................
Provision (credit) for loan and lease losses ............................
Net interest income after provision (credit) for loan and
lease losses ......................................................................
Non-interest income ..............................................................
Non-interest expense ..............................................................
Income before income taxes ...............................................
Income tax expense ............................................................
Net income ......................................................................... $
Earnings per share:
Basic .................................................................................. $
Diluted ............................................................................... $
8,544 $
1,006
7,538
696
6,842
1,331
6,804
1,369
226
1,143 $
0.07 $
0.07 $
(in thousands, except share data)
Interest income ....................................................................... $
Interest expense ......................................................................
Net interest income ............................................................
(Credit) provision for loan and lease losses ...........................
Net interest income after (credit) provision for loan and
lease losses ......................................................................
Non-interest income ..............................................................
Non-interest expense ..............................................................
Income before income taxes ...............................................
Income tax (benefit) expense .............................................
Net income ......................................................................... $
Earnings per share:
Basic .................................................................................. $
Diluted ............................................................................... $
March 31,
7,697 $
1,415
6,282
(494)
6,776
3,419
6,782
3,413
(62)
3,475 $
0.21 $
0.21 $
106
June 30,
September 30, December 31,
8,776
8,765 $
1,056
1,085
7,720
7,680
295
(234)
8,663 $
1,050
7,613
396
7,217
2,094
7,025
2,286
661
1,625 $
0.10 $
0.10 $
7,914
1,380
6,553
2,741
724
2,017 $
0.12 $
0.12 $
2015
Quarter Ended
7,425
1,398
7,163
1,660
136
1,524
0.09
0.09
June 30,
September 30, December 31,
8,606
8,199 $
991
1,017
7,615
7,182
(1,005)
(191)
7,699 $
1,378
6,321
345
5,976
1,545
6,680
841
22
819 $
0.05 $
0.05 $
7,373
1,379
6,415
2,337
-
2,337 $
0.14 $
0.14 $
8,620
1,457
8,587
1,490
(27,719)
29,209
1.77
1.77
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
FNCB’s management has 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, as of December 31, 2016.
Based on that evaluation, FNCB’s Chief Executive Officer and Chief Financial Officer concluded FNCB’s disclosure controls
and procedures were effective as of December 31, 2016.
There have been no changes to FNCB’s internal control over financial reporting during FNCB’s fourth quarter of 2016 that
have materially affected, or are reasonably likely to materially affect, FNCB’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for FNCB
Bancorp, Inc. (the “Company”). Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States and is not intended to provide absolute
assurance that a misstatement of the Company’s financial statements would be prevented or detected.
Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that
in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company are only being made in
accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. The design of a control system inherently has limitations and the benefits of
controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the controls. Therefore, no assessment of a cost-
effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will
be detected.
As of December 31, 2016, management of the Company conducted an assessment of the effectiveness of the Company’s
internal control over financial reporting based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included
extensive documenting, evaluating and testing the design and operating effectiveness of our internal control over financial
reporting.
Based on this evaluation under the criteria in the Framework, management concluded that the Company’s system of internal
control over financial reporting was effective as of December 31, 2016.
Baker Tilly Virchow Krause, LLP, the Company’s independent registered public accounting firm that audited the Company’s
consolidated financial statements, has issued an audit report on the Company’s internal control over financial reporting as of
December 31, 2016. That report appears below.
/s/ Gerard A. Champi
Gerard A. Champi
President and Chief Executive Officer
/s/ James M. Bone, Jr., CPA
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
107
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors of
FNCB Bancorp, Inc. and Subsidiaries
We have audited FNCB Bancorp, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated statements of financial condition of FNCB Bancorp, Inc. and Subsidiaries as of December 31, 2016 and
2015 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash
flows for each of the years in the three-year period ended December 31, 2016, and our report dated March 10, 2017 expressed
an unqualified opinion.
/s/Baker Tilly Virchow Krause, LLP
Wilkes-Barre, Pennsylvania
March 10, 2017
108
Item 9B. Other Information
None
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information concerning the Directors and Executive Officers of FNCB required by this Item 10 is incorporated herein
by reference to the sections entitled “Information as to Nominees, Directors and Executive Officers” in FNCB’s Definitive
Proxy Statement for its 2017 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission on or about April 18, 2017 (the “Proxy Statement”). Disclosure of compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, by FNCB’s Directors and Executive Officers is incorporated by reference to
the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. In addition,
information concerning Audit Committee and Audit Committee Financial Expert is included in the Proxy Statement under
the caption “Audit Committee Report” and is incorporated herein by reference.
FNCB has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to FNCB’s directors and employees,
including the President and Principal Executive Officer (“PEO”), Principal Financial Officer (“PFO”) and Principal
Accounting Officer (“PAO”). The Code includes guidelines relating to compliance with laws, the ethical handling of actual
or potential conflicts of interest, the use of corporate opportunities, protection and use of FNCB’s confidential information,
accepting gifts and business courtesies, accurate financial and regulatory reporting, and procedures for promoting compliance
with, and reporting violations of, the Code. The Code is available on FNCB’s website at www.fncb.com/investorrelations/
under the heading “Governance Documents.” FNCB intends to post any amendments to the Code on its website and also to
disclose any waivers (to the extent applicable to FNCB’s President, PEO, PFO or PAO) on a Form 8-K within the prescribed
time period.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to the section entitled “Executive Compensation”
in FNCB’s Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 is incorporated herein by reference to the section entitled “Principal Beneficial
Owners of FNCB’s Common Stock” in FNCB’s Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 related to certain relationships and related transactions is incorporated herein by
reference to the section entitled “Certain Relationships and Related Transactions” in FNCB’s Proxy Statement. The
information required under this Item 13 related to Director Independence is incorporated herein by reference to the section
entitled “Corporate Governance” in FNCB’s Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated herein by reference to the section entitled “Fees Paid to Independent
Registered Public Accounting Firm” in FNCB’s Proxy Statement.
109
PART IV
Item 15. Exhibits and Financial Statement Schedules
1. Financial Statements
The following financial statements are included by reference in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm ........................................................................................
Consolidated Statements of Financial Condition ........................................................................................................
Consolidated Statements of Income ............................................................................................................................
Consolidated Statements of Comprehensive Income ................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity ....................................................................................
Consolidated Statements of Cash Flows .....................................................................................................................
Notes to Consolidated Financial Statements ...............................................................................................................
55
56
57
58
59
60
61
2. Financial Statement Schedules
Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown
in the respective financial statements or in the notes thereto.
3. The following exhibits are filed herewith or incorporated by reference.
EXHIBIT 3.1
EXHIBIT 3.2
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4+
EXHIBIT 10.5+
EXHIBIT 10.6
EXHIBIT 10.7+
Amended and Restated Articles of Incorporation dated October 4, 2016 — filed as Exhibit 3.1 to
FNCB’s Current Report on Form 8-K on October 4, 2016, is hereby incorporated by reference.
Amended and Restated Bylaws — filed as Exhibit 3.2 to FNCB’s Current Report on Form 8-K on
October 4, 2016, is hereby incorporated by reference.
Form of Common Stock Certificate — filed as Exhibit 4.1 to FNCB’s Form 10-Q for the quarter
ended September 30, 2016, as filed on November 4, 2016, is hereby incorporated by reference.
Form of Amended and Restated Subordinated Note — filed as Exhibit 4.2 to FNCB’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2015, as filed on August 7, 2015, is hereby
incorporated by reference.
Amended and Restated Declaration of Trust by and among Wilmington Trust Company, First
National Community Bancorp, Inc. and with individuals as administrators, dated as of December 14,
2006 — filed as Exhibit 10.1 to FNCB’s 8-K on December 19, 2006 is hereby incorporated by
reference.
Guarantee Agreement by and between First National Community Bancorp, Inc. and Wilmington
Trust Company, dated as of December 14, 2006 - filed as Exhibit 10.4 to FNCB’s Current Report on
Form 8-K on December 19, 2006, SEC file number 333-24121, is hereby incorporated by reference.
Indenture by and between First National Community Bancorp, Inc. and Wilmington Trust Company,
dated as of December 14, 2006 — filed as Exhibit 10.2 to FNCB’s Current Report on Form 8-K on
December 19, 2006, SEC file number 333-24121, is hereby incorporated by reference.
2000 Stock Incentive Plan — filed as Exhibit 10.2 to FNCB’s Form 10-K for the year ended
December 31, 2004, SEC file number 333-24121 — as filed on March 16, 2005, is hereby
incorporated by reference.
Directors’ and Officers’ Deferred Compensation Plan - filed as Exhibit 10.4 to FNCB’s Form 10-K
for the year ended December 31, 2004 — as filed on March 16, 2005, is hereby incorporated by
reference.
Stipulation of Settlement dated November 27, 2013 – filed as Exhibit 10.1 to FNCB’s Current Report
on Form 8-K on December 4, 2013, is hereby incorporated by reference.
2013 Long-Term Incentive Compensation Plan – filed as Exhibit 10.1 to FNCB’s Current Report on
Form 8-K on December 27, 2013, is hereby incorporated by reference.
110
EXHIBIT 10.8+
EXHIBIT 10.9+
Executive Incentive Plan – filed as Exhibit 10.14 to FNCB’s Form 10-K for the year ended December
31, 2012, as filed on March 28, 2013, is hereby incorporated by reference.
2012 Employee Stock Grant Plan – filed as Exhibit 10.15 to FNCB’s Form 10-K for the year ended
December 31, 2012, as filed on March 28, 2013, is hereby incorporated by reference.
EXHIBIT 10.10+
2013 Employee Stock Grant Plan – filed as Exhibit 10.18 to FNCB’s Form 10-K for the year ended
December 31, 2013, as filed on March 24, 2014, is hereby incorporated by reference.
EXHIBIT 10.11+
2014 Employee Stock Grant Plan – filed as Exhibit 10.1 to FNCB’s Form 10-Q for the quarter ended
September 30, 2014, as filed on November 10, 2014 is hereby incorporated by reference.
EXHIBIT 10.12+
2015 Employee Stock Grant Plan – filed as Exhibit 10.12 to FNCB’s Form 10-K for the year ended
December 31, 2015, as filed on March 11, 2016, is hereby incorporated by reference.
EXHIBIT 10.13+
Form of Restricted Stock Award Agreement – filed as Exhibit 4.2 to FNCB’s Form S-8 on January
24, 2014 is hereby incorporated by reference.
EXHIBIT 10.14+
Form of Stock Option Award Agreement – filed as Exhibit 4.3 to FNCB’s Form S-8 on January 24,
2014 is hereby incorporated by reference.
EXHIBIT 10.15+
First National Community Bank Supplemental Executive Retirement Plan – filed as Exhibit 10.16 to
FNCB’s Current Report on Form 8-K on October 2, 2015, is hereby incorporated by reference.
EXHIBIT 10.16+
EXHIBIT 10.17+
EXHIBIT 10.18+
Employment Agreement Between First National Community Bank and Gerard A. Champi, COO –
filed as Exhibit 10.17 to FNCB’s Current Report on Form 8-K on October 2, 2015, is hereby
incorporated by reference.
Employment Agreement Between First National Community Bancorp, Inc., First National
Community Bank and James M. Bone, Jr. CFO – filed as Exhibit 10.18 to FNCB’s Current Report
on Form 8-K on October 2, 2015, is hereby incorporated by reference.
Employment Agreement Between First National Community Bank and Brian C. Mahlstedt, CLO –
filed as Exhibit 10.19 to FNCB’s Current Report on Form 8-K on October 2, 2015, is hereby
incorporated by reference.
EXHIBIT 21
Subsidiaries – filed as Exhibit 21 to FNCB’s Form 10-K for the year ended December 31, 2009, as
filed on March 16, 2010, is hereby incorporated by reference.
EXHIBIT 23*
Consent of Baker Tilly Virchow Krause, LLP
EXHIBIT 31.1*
Certification of Chief Executive Officer
EXHIBIT 31.2*
Certification of Chief Financial Officer
EXHIBIT 32**
Section 1350 Certification — Chief Executive Officer and Chief Financial Officer
EXHIBIT 101.INS
XBRL INSTANCE DOCUMENT
EXHIBIT 101.SCH XBRL TAXONOMY EXTENSION SCHEMA
EXHIBIT 101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EXHIBIT 101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EXHIBIT 101.LAB XBRL TAXONOMY EXTENSION LABEL LINKBASE
EXHIBIT 101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
_____________________________
* Filed herewith
** Furnished herewith
+ Management contract, compensatory plan or arrangement
111
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Gerard A. Champi
Gerard A. Champi
President and Chief Executive Officer
/s/ James M. Bone, Jr.
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
Principal Financial Officer
/s/ Stephanie A. Westington
Stephanie A. Westington, CPA
Senior Vice President and Controller
Principal Accounting Officer
March 10, 2017
Date
March 10, 2017
Date
March 10, 2017
Date
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
Directors:
/s/ William G. Bracey.
William G, Bracey
March 10, 2017
Date
/s/ Gerard A. Champi
Gerard A. Champi
March 10, 2017
Date
/s/ Joseph Coccia
Joseph Coccia
March 10, 2017
Date
/s/ Dominick L. DeNaples
Dominick L. DeNaples
March 10, 2017
Date
/s/ Louis A. DeNaples
Louis A. DeNaples
March 10, 2017
Date
/s/ Louis A. DeNaples, Jr.
Louis A. DeNaples, Jr.
March 10, 2017
Date
/s/ Keith W. Eckel
Keith W. Eckel
March 10, 2017
Date
/s/ Thomas J. Melone
Thomas J. Melone
March 10, 2017
Date
/s/ John P. Moses
John P. Moses
March 10, 2017
Date
112
Shareholder Information
CORPORATE HEADQUARTERS
FNCB Bancorp, Inc.
102 East Drinker Street
Dunmore, PA 18512
Phone: 570-346-7667
or 1-877-TRY-FNCB
www.fncb.com
STOCK LISTING
Common stock of FNCB Bancorp, Inc.
is listed on the OTCQX market under
the symbol: FNCB
ANNUAL MEETING
Wednesday, May 17, 2017
9:00 a.m. ET
FNCB Bank's Exeter Branch Office
1625 Wyoming Avenue
Exeter, PA 18643
TRANSFER AGENT AND REGISTRANT OF STOCK
Shareholders requiring a change of name,
address or ownership of stock, or information
about shareholder records, lost or stolen
certificates, and dividend checks, direct
deposit, dividend reinvestment and optional
cash purchase should contact:
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Phone: (718) 921-8124 or (800) 937-5449
Email: info@astfinancial.com
www.astfinancial.com
INDEPENDENT AUDITORS
Baker Tilly Virchow Krause, LLP
46 Public Square, Suite 400
Wilkes-Barre, PA 18701
SEC LEGAL COUNSEL
Cozen O'Connor
One Liberty Place
1650 Market Street, Suite 2800
Philadelphia, PA 19103
INVESTOR INFORMATION
Investor and shareholder information regarding
FNCB Bancorp, Inc., including all filings with
the Securities and Exchange Commission, is
available through FNCB's website:
www.fncb.com/investorrelations
Copies may also be obtained without
charge upon written request to:
Mr. James M. Bone, Jr., CPA
Investor Relations Department
FNCB Bancorp, Inc.
102 East Drinker Street
Dunmore, PA 18512
Phone: (570) 348-6419
james.bone@fncb.com
MARKET MAKERS
FNCB Wealth Management Services
102 East Drinker Street
Dunmore, PA 18512
Phone: (888) 845-3622 or (570) 348-4321
Monroe Securities
100 North Riverside Plaza
Chicago, IL 60606
Phone: (312) 327-2530
Stifel Financial
501 North Broadway
St. Louis, MO 63102
Phone: (314) 342-2000
Boenning & Scattergood, Inc.
Four Tower Bridge
200 Barr Harbor Drive, Suite 300
West Conshohocken, PA 19428
(800) 883-1212
BauerFinancial, the nation’s leading
independent bank and credit union
rating and research firm, has rated
FNCB Bancorp, Inc.’s wholly-owned
subsidiary, FNCB Bank 5-Stars and
places FNCB on its prestigious list of
recommended financial institutions.
FNCB BANCORP, INC.
102 EAST DRINKER STREET, DUNMORE, PA 18512