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

 

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 “Related Party Transactions” to these consolidated financial statements.

 

For information about credit concentrations within FNCB’s loan portfolio, refer to Note “Commitments, Contingencies and Concentrations” to these consolidated financial statements.

 

FNCB originates - to -family mortgage loans for sale in the market. During the years ended and FNCB sold million, million and million of - to -family mortgages, respectively. Net gains on the sale of residential mortgage loans for the years ended and were thousand, thousand and thousand, respectively. FNCB retains servicing rights on these mortgages. At and there were thousand and thousand in - to -family residential mortgage loans held for sale, respectively.

 

During the year ended FNCB sold the guaranteed principal balance of loans that were guaranteed by the SBA totaling million. A net gain of thousand was realized upon the sale and included in non-interest income for the year ended FNCB retained the servicing rights on these loans. There were sales of guaranteed loans during the years ended or The unpaid principal balance of loans serviced for others, including residential mortgages and SBA guaranteed loans were million and million at and respectively.

 

FNCB sold all of its education loans, which are categorized as consumer loans, to a party during the year ended The education loans had a recorded investment of million at the time of sale. FNCB recognized a loss of thousand upon the sale of these loans which is included in non-interest income for the year ended 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.

 

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 components:

 

 

As part of its evaluation, management considers qualitative and environmental factors, including, but not limited to:

 

 

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 be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses 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 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 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 thousand at 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 consecutive quarters, which had resulted in an overall negative historical loss factor and consequently negative provisions for the commercial and industrial loan segment at Based on the risk characteristics inherent in this segment of the portfolio, management reversed the negative provision and established the unallocated reserve. As of 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 and

 

 

 

 

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 party to assess the quality of the loan portfolio and evaluate the accuracy of ratings with the loan officer’s and management’s assessment.

 

FNCB’s loan rating system assigns a degree of risk to commercial loans based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Management analyzes these non-homogeneous loans individually by grading the loans as to credit risk and probability of collection for each type of loan. Commercial and industrial loans include commercial indirect auto loans which are not individually risk rated, and construction, land acquisition and development loans include residential construction loans which are also not individually risk rated. These loans are monitored on a pool basis due to their homogeneous nature as described in “Credit Quality Indicators – Other Loans” below. FNCB risk rates certain residential real estate loans and consumer loans that are part of a larger commercial relationship using its credit grading system as described in “Credit Quality Indicators – Commercial Loans.” The grading system contains the following basic risk categories:

 

Minimal Risk

Above Average Credit Quality

Average Risk

Acceptable Risk

Pass - Watch

Special Mention

Substandard - Accruing

Substandard - Non-Accrual

Doubtful

Loss

 

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

 

Pass - Assets rated through are considered pass ratings. These assets show 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.

 

Certain residential real estate loans, consumer loans, and commercial indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that are delinquent days or more are placed on non-accrual status unless collection of the loan is in process and reasonably assured. FNCB utilizes accruing versus non-accrual status as the credit quality indicator for these loan pools.

 

The following tables present the recorded investment in loans receivable by loan category and credit quality indicator at and

 

 

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 million and million at and respectively. Generally, loans are placed on non-accrual status when they become days or more delinquent, and remain on non-accrual status until they are brought current, have months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exists. Therefore, loans be current in accordance with their loan terms, or be less than days delinquent and still be on a non-accrual status. There were loans past due days or more and still accruing at and

 

December

31,

2016

2015:

 

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 at and Non-accrual loans, other than TDRs, with balances less than the thousand loan relationship threshold are not evaluated individually for impairment and accordingly, are not included in the following tables. However, these loans are evaluated collectively for impairment as homogenous pools in the general allowance under ASC Topic Total non-accrual loans, other than TDRs, with balances less than the thousand loan relationship threshold that were evaluated under ASC Topic amounted to million at both and