FNCB Bancorp, Inc. - 10-K filing on 2017-03-10

Note 8 - Borrowed Funds

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Debt Disclosure [Text Block]

Note

. BORROWED FUNDS

The following table summarizes the components of borrowed funds at

December

31,

2016

and

2015:

	December 31,
(in thousands)	2016		2015
Federal Home Loan Bank of Pittsburgh advances - overnight	$	-	$	60,500
Federal Home Loan Bank of Pittsburgh advances - term		58,537		75,302
Subordinated debentures		10,000		14,000
Junior subordinated debentures		10,310		10,310
Total	$	78,847	$	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

-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.

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

-month LIBOR rate. The average interest rate paid on the Debentures was

2.35%

2016,

1.99%

2015,

and

1.93%

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

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.

September

2009,

FNCB offered only to accredited investors up to

$25.0

million principal amount of unsecured subordinated debentures due

September

2019

(the “Notes”). Prior to

July

2015,

the Notes had a fixed interest rate of

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%

4.50%

effective

July

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

2017;

(b)

20%

of the original principal amounts, or

$5.0

million, payable on

September

2018;

and (c) the final

20%

of the original principal amount, or

$5.0

million, payable on

September

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

2017,

was paid to Noteholders on

December

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

2010

and ending on

June

2015.

Beginning with the

September

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

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

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:

	December 31, 2016
(in thousands)	Amount		Weighted Average Interest Rate
Within one year	$	47,553		0.68	%
After one year but within two years		10,000		2.77	%
After two years but within three years		10,984		3.26	%
After three years but within four years		-		-
After four years but within five years		-		-
After five years		10,310		2.39	%
Total	$	78,847		1.53	%