UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedSeptember 30, 20172023
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 001-38408
FNCB BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania | 23-2900790 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
102 E. Drinker St., Dunmore, PA | 18512 | |
(Address of Principal Executive Offices) | (Zip Code) |
(570) 346-7667
Registrant’sRegistrant’s telephone number, including area code (570) 346-7667
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, $1.25 par value | FNCB | Nasdaq Capital Market |
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. YESYes ☒ NONo ☐
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(§ 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). YESYes ☒ NONo ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large | Accelerated | |
Non-accelerated filer ☒ | ||
| Smaller reporting company | |
Emerging growth |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’sissuer’s classes of common stock as of the latest practicable date:19,783,031 shares as of November 3, 2023.
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Consolidated Statements of Changes in |
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Item 3. | |
Proceedings. | |
Factors. | |
Item 2. Unregistered Sales of Equity Securities and Use of | |
Securities. | |
Disclosures. | |
Information. | |
Exhibits. |
Part I - Financial Information
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | |||||||
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September 30, | December 31, | |||||||
(in thousands, except share data) | 2017 | 2016 | ||||||
Assets | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 24,881 | $ | 20,562 | ||||
Interest-bearing deposits in other banks | 18,929 | 91,883 | ||||||
Total cash and cash equivalents | 43,810 | 112,445 | ||||||
Securities available for sale, at fair value | 282,037 | 276,015 | ||||||
Stock in Federal Home Loan Bank of Pittsburgh, at cost | 2,450 | 3,311 | ||||||
Loans held for sale | 147 | 596 | ||||||
Loans, net of allowance for loan and lease losses of $8,862 and $8,419 | 750,627 | 722,860 | ||||||
Bank premises and equipment, net | 10,482 | 10,784 | ||||||
Accrued interest receivable | 3,203 | 2,757 | ||||||
Bank-owned life insurance | 30,332 | 29,933 | ||||||
Other real estate owned | 1,088 | 2,048 | ||||||
Net deferred tax assets | 23,507 | 26,875 | ||||||
Other assets | 9,428 | 7,975 | ||||||
Total assets | $ | 1,157,111 | $ | 1,195,599 | ||||
Liabilities | ||||||||
Deposits: | ||||||||
Demand (non-interest-bearing) | $ | 162,426 | $ | 173,702 | ||||
Interest-bearing | 820,786 | 841,437 | ||||||
Total deposits | 983,212 | 1,015,139 | ||||||
Borrowed funds: | ||||||||
Federal Home Loan Bank of Pittsburgh advances | 45,350 | 58,537 | ||||||
Subordinated debentures | 5,000 | 10,000 | ||||||
Junior subordinated debentures | 10,310 | 10,310 | ||||||
Total borrowed funds | 60,660 | 78,847 | ||||||
Accrued interest payable | 244 | 242 | ||||||
Other liabilities | 15,513 | 11,000 | ||||||
Total liabilities | 1,059,629 | 1,105,228 | ||||||
Shareholders' equity | ||||||||
Preferred stock ($1.25 par) | ||||||||
Authorized: 20,000,000 shares at September 30, 2017 and December 31, 2016 | ||||||||
Issued and outstanding: 0 shares at September 30, 2017 and December 31, 2016 | - | - | ||||||
Common stock ($1.25 par) | ||||||||
Authorized: 50,000,000 shares at September 30, 2017 and December 31, 2016 | ||||||||
Issued and outstanding: 16,757,963 shares at September 30, 2017 and 16,645,845 shares at December 31, 2016 | 20,947 | 20,807 | ||||||
Additional paid-in capital | 63,143 | 62,593 | ||||||
Retained earnings | 13,282 | 8,531 | ||||||
Accumulated other comprehensive income (loss) | 110 | (1,560 | ) | |||||
Total shareholders' equity | 97,482 | 90,371 | ||||||
Total liabilities and shareholders’ equity | $ | 1,157,111 | $ | 1,195,599 |
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September 30, | December 31, | |||||||
2023 | 2022 | |||||||
(in thousands, except share data) | (Unaudited) | (Audited) | ||||||
Assets | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 42,081 | $ | 26,588 | ||||
Interest-bearing deposits in other banks | 34,990 | 15,328 | ||||||
Total cash and cash equivalents | 77,071 | 41,916 | ||||||
Available-for-sale debt securities, at fair value | 437,142 | 476,091 | ||||||
Equity securities, at fair value | 6,104 | 7,717 | ||||||
Restricted stock, at cost | 8,842 | 8,545 | ||||||
Loans held for sale | - | 60 | ||||||
Loans and leases, net of allowance for credit losses of $12,149 and $14,193 | 1,193,603 | 1,110,124 | ||||||
Bank premises and equipment, net | 14,790 | 15,616 | ||||||
Accrued interest receivable | 6,599 | 5,957 | ||||||
Bank-owned life insurance | 37,111 | 36,499 | ||||||
Other assets | 45,511 | 43,005 | ||||||
Total assets | $ | 1,826,773 | $ | 1,745,530 | ||||
Liabilities | ||||||||
Deposits: | ||||||||
Demand (non-interest-bearing) | $ | 297,740 | $ | 305,850 | ||||
Interest-bearing | 1,204,635 | 1,114,797 | ||||||
Total deposits | 1,502,375 | 1,420,647 | ||||||
Borrowed funds: | ||||||||
Federal Home Loan Bank of Pittsburgh advances | 176,423 | 172,050 | ||||||
Junior subordinated debentures | 10,310 | 10,310 | ||||||
Total borrowed funds | 186,733 | 182,360 | ||||||
Accrued interest payable | 1,001 | 171 | ||||||
Other liabilities | 18,862 | 23,403 | ||||||
Total liabilities | 1,708,971 | 1,626,581 | ||||||
Shareholders' equity | ||||||||
Preferred shares ($1.25 par) | ||||||||
Authorized: 20,000,000 shares at September 30, 2023 and December 31, 2022 | ||||||||
Issued and outstanding: 0 shares at September 30, 2023 and December 31, 2022 | - | - | ||||||
Common shares ($1.25 par) | ||||||||
Authorized: 50,000,000 shares at September 30, 2023 and December 31, 2022 | ||||||||
Issued and outstanding: 19,780,317 shares at September 30, 2023 and 19,681,644 shares at December 31, 2022 | 24,725 | 24,602 | ||||||
Additional paid-in capital | 78,050 | 77,502 | ||||||
Retained earnings | 70,221 | 64,873 | ||||||
Accumulated other comprehensive loss | (55,194 | ) | (48,028 | ) | ||||
Total shareholders' equity | 117,802 | 118,949 | ||||||
Total liabilities and shareholders’ equity | $ | 1,826,773 | $ | 1,745,530 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF INCOME | |||||||||||
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands, except share data) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest income | ||||||||||||||||
Interest and fees on loans | $ | 7,576 | $ | 7,098 | $ | 21,748 | $ | 20,984 | ||||||||
Interest and dividends on securities: | ||||||||||||||||
U.S. government agencies | 816 | 848 | 2,566 | 2,678 | ||||||||||||
State and political subdivisions, tax-free | 7 | 9 | 42 | 30 | ||||||||||||
State and political subdivisions, taxable | 1,016 | 675 | 2,816 | 1,834 | ||||||||||||
Other securities | 166 | 127 | 409 | 432 | ||||||||||||
Total interest and dividends on securities | 2,005 | 1,659 | 5,833 | 4,974 | ||||||||||||
Interest on interest-bearing deposits in other banks | 24 | 8 | 146 | 14 | ||||||||||||
Total interest income | 9,605 | 8,765 | 27,727 | 25,972 | ||||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 943 | 704 | 2,513 | 2,009 | ||||||||||||
Interest on borrowed funds: | ||||||||||||||||
Interest on Federal Home Loan Bank of Pittsburgh advances | 163 | 157 | 424 | 472 | ||||||||||||
Interest on subordinated debentures | 97 | 162 | 323 | 480 | ||||||||||||
Interest on junior subordinated debentures | 77 | 62 | 219 | 180 | ||||||||||||
Total interest on borrowed funds | 337 | 381 | 966 | 1,132 | ||||||||||||
Total interest expense | 1,280 | 1,085 | 3,479 | 3,141 | ||||||||||||
Net interest income before provision (credit) for loan and lease losses | 8,325 | 7,680 | 24,248 | 22,831 | ||||||||||||
Provision (credit) for loan and lease losses | 543 | (234 | ) | 486 | 858 | |||||||||||
Net interest income after provision (credit) for loan and lease losses | 7,782 | 7,914 | 23,762 | 21,973 | ||||||||||||
Non-interest income | ||||||||||||||||
Deposit service charges | 728 | 739 | 2,147 | 2,157 | ||||||||||||
Net gain on the sale of available-for-sale securities | 367 | - | 1,338 | 960 | ||||||||||||
Net gain on the sale of mortgage loans held for sale | 106 | 99 | 241 | 238 | ||||||||||||
Net gain on the sale of SBA guaranteed loans | 23 | 51 | 79 | 51 | ||||||||||||
Net gain on the sale of other repossessed assets | - | - | 47 | - | ||||||||||||
Net gain on the sale of other real estate owned | - | 32 | 57 | 29 | ||||||||||||
Loan-related fees | 96 | 85 | 252 | 287 | ||||||||||||
Income from bank-owned life insurance | 129 | 137 | 399 | 426 | ||||||||||||
Other | 265 | 237 | 747 | 657 | ||||||||||||
Total non-interest income | 1,714 | 1,380 | 5,307 | 4,805 | ||||||||||||
Non-interest expense | ||||||||||||||||
Salaries and employee benefits | 3,247 | 3,263 | 10,069 | 10,366 | ||||||||||||
Occupancy expense | 394 | 479 | 1,567 | 1,301 | ||||||||||||
Equipment expense | 474 | 429 | 1,380 | 1,277 | ||||||||||||
Advertising expense | 119 | 157 | 424 | 422 | ||||||||||||
Data processing expense | 506 | 505 | 1,502 | 1,522 | ||||||||||||
Regulatory assessments | 160 | 199 | 497 | 629 | ||||||||||||
Bank shares tax | 252 | 253 | 762 | 746 | ||||||||||||
Expense of other real estate owned | 104 | 95 | 432 | 335 | ||||||||||||
Legal expense | 23 | 79 | 115 | 285 | ||||||||||||
Professional fees | 206 | 157 | 662 | 716 | ||||||||||||
Insurance expense | 132 | 131 | 385 | 384 | ||||||||||||
Other losses | 49 | 67 | 334 | 234 | ||||||||||||
Other operating expenses | 731 | 739 | 2,136 | 2,165 | ||||||||||||
Total non-interest expense | 6,397 | 6,553 | 20,265 | 20,382 | ||||||||||||
Income before income tax expense | 3,099 | 2,741 | 8,804 | 6,396 | ||||||||||||
Income tax expense | 827 | 724 | 2,543 | 1,611 | ||||||||||||
Net income | $ | 2,272 | $ | 2,017 | $ | 6,261 | $ | 4,785 | ||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.14 | $ | 0.12 | $ | 0.37 | $ | 0.29 | ||||||||
Diluted | $ | 0.14 | $ | 0.12 | $ | 0.37 | $ | 0.29 | ||||||||
Cash dividends declared per common share | $ | 0.03 | $ | 0.02 | $ | 0.09 | $ | 0.06 | ||||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | ||||||||||||||||
Basic | 16,757,963 | 16,593,811 | 16,711,172 | 16,554,391 | ||||||||||||
Diluted | 16,777,671 | 16,593,811 | 16,728,852 | 16,556,154 |
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands, except share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Interest income | ||||||||||||||||
Interest and fees on loans and leases | $ | 17,224 | $ | 12,270 | $ | 47,642 | $ | 33,472 | ||||||||
Interest and dividends on securities: | ||||||||||||||||
Taxable | 3,063 | 2,633 | 9,204 | 7,425 | ||||||||||||
Tax-exempt | 539 | 691 | 1,670 | 1,961 | ||||||||||||
Dividends | 248 | 163 | 744 | 353 | ||||||||||||
Total interest and dividends on securities | 3,850 | 3,487 | 11,618 | 9,739 | ||||||||||||
Interest on interest-bearing deposits in other banks | 243 | 19 | 672 | 34 | ||||||||||||
Total interest income | 21,317 | 15,776 | 59,932 | 43,245 | ||||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 6,446 | 1,001 | 16,968 | 1,671 | ||||||||||||
Interest on borrowed funds: | ||||||||||||||||
Federal Reserve Discount Window advances | 205 | - | 297 | - | ||||||||||||
Federal Home Loan Bank of Pittsburgh advances | 2,268 | 736 | 6,715 | 1,009 | ||||||||||||
Junior subordinated debentures | 191 | 99 | 531 | 220 | ||||||||||||
Total interest on borrowed funds | 2,664 | 835 | 7,543 | 1,229 | ||||||||||||
Total interest expense | 9,110 | 1,836 | 24,511 | 2,900 | ||||||||||||
Net interest income before (credit to) provision for credit losses - loans and leases | 12,207 | 13,940 | 35,421 | 40,345 | ||||||||||||
(Credit to) provision for credit losses - loans and leases | (270 | ) | 513 | 1,504 | 1,334 | |||||||||||
Net interest income after (credit to) provision for credit losses - loans and leases | 12,477 | 13,427 | 33,917 | 39,011 | ||||||||||||
Non-interest income | ||||||||||||||||
Deposit service charges | 1,132 | 1,133 | 3,319 | 3,248 | ||||||||||||
Net gain (loss) on the sale of available-for-sale debt securities | - | - | 252 | (35 | ) | |||||||||||
Net (loss) gain on equity securities | (233 | ) | 86 | (1,773 | ) | (121 | ) | |||||||||
Net gain on the sale of mortgage loans held for sale | 1 | 91 | 2 | 123 | ||||||||||||
Loan-related fees | 64 | 54 | 235 | 161 | ||||||||||||
Income from cash surrender value of bank-owned life insurance | 210 | 200 | 612 | 542 | ||||||||||||
Merchant services revenue | 146 | 173 | 464 | 544 | ||||||||||||
Wealth management services revenue | 237 | 109 | 720 | 345 | ||||||||||||
Other | 137 | 295 | 482 | 781 | ||||||||||||
Total non-interest income | 1,694 | 2,141 | 4,313 | 5,588 | ||||||||||||
Non-interest expense | ||||||||||||||||
Salaries and employee benefits | 4,935 | 4,581 | 14,859 | 13,758 | ||||||||||||
Occupancy expense | 516 | 517 | 1,587 | 1,512 | ||||||||||||
Equipment expense | 229 | 314 | 733 | 954 | ||||||||||||
Advertising expense | 198 | 202 | 595 | 561 | ||||||||||||
Data processing expense | 1,034 | 974 | 2,984 | 3,046 | ||||||||||||
Regulatory assessments | 283 | 230 | 808 | 651 | ||||||||||||
Insurance expense | 175 | 167 | 518 | 477 | ||||||||||||
Bank shares tax | 264 | 375 | 676 | 1,091 | ||||||||||||
Professional fees | 265 | 297 | 781 | 837 | ||||||||||||
Director Fees | 248 | 229 | 416 | 388 | ||||||||||||
(Credit) provision for unfunded commitments | (235 | ) | 338 | (729 | ) | 461 | ||||||||||
Merger and acquisition expenses | 537 | - | 537 | - | ||||||||||||
Other operating expenses | 851 | 808 | 2,558 | 2,072 | ||||||||||||
Total non-interest expense | 9,300 | 9,032 | 26,323 | 25,808 | ||||||||||||
Income before income tax expense | 4,871 | 6,536 | 11,907 | 18,791 | ||||||||||||
Income tax expense | 709 | 1,101 | 2,277 | 3,265 | ||||||||||||
Net income | $ | 4,162 | $ | 5,435 | $ | 9,630 | $ | 15,526 | ||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.21 | $ | 0.28 | $ | 0.49 | $ | 0.79 | ||||||||
Diluted | $ | 0.21 | $ | 0.28 | $ | 0.49 | $ | 0.79 | ||||||||
Cash dividends declared per common share | $ | 0.090 | $ | 0.090 | $ | 0.270 | $ | 0.240 | ||||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | ||||||||||||||||
Basic | 19,776,342 | 19,687,766 | 19,724,956 | 19,765,814 | ||||||||||||
Diluted | 19,776,360 | 19,697,047 | 19,727,790 | 19,786,855 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME | |||||
(unaudited) | |||||
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 2,272 | $ | 2,017 | $ | 6,261 | $ | 4,785 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Unrealized (losses) gains on securities available for sale | (1,290 | ) | (1,199 | ) | 3,868 | 10,495 | ||||||||||
Taxes | 439 | 408 | (1,315 | ) | (3,568 | ) | ||||||||||
Net of tax amount | (851 | ) | (791 | ) | 2,553 | 6,927 | ||||||||||
Reclassification adjustment for gains included in net income | (367 | ) | - | (1,338 | ) | (960 | ) | |||||||||
Taxes | 125 | - | 455 | 326 | ||||||||||||
Net of tax amount | (242 | ) | - | (883 | ) | (634 | ) | |||||||||
Total other comprehensive (loss) income | (1,093 | ) | (791 | ) | 1,670 | 6,293 | ||||||||||
Comprehensive income | $ | 1,179 | $ | 1,226 | $ | 7,931 | $ | 11,078 |
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net income | $ | 4,162 | $ | 5,435 | $ | 9,630 | $ | 15,526 | ||||||||
Other comprehensive loss: | ||||||||||||||||
Unrealized losses on available-for-sale debt securities | (12,457 | ) | (22,652 | ) | (9,526 | ) | (74,938 | ) | ||||||||
Taxes | 2,616 | 4,757 | 2,000 | 15,737 | ||||||||||||
Net of tax amount | (9,841 | ) | (17,895 | ) | (7,526 | ) | (59,201 | ) | ||||||||
Reclassification adjustment (gains) losses included in net income | - | - | (252 | ) | 35 | |||||||||||
Taxes | - | - | 53 | (7 | ) | |||||||||||
Net of tax amount | - | - | (199 | ) | 28 | |||||||||||
Derivative adjustments | 1,118 | 214 | 708 | 880 | ||||||||||||
Taxes | (235 | ) | (45 | ) | (149 | ) | (185 | ) | ||||||||
Net of tax amount | 883 | 169 | 559 | 695 | ||||||||||||
Total other comprehensive loss | (8,958 | ) | (17,726 | ) | (7,166 | ) | (58,478 | ) | ||||||||
Comprehensive (loss) income | $ | (4,796 | ) | $ | (12,291 | ) | $ | 2,464 | $ | (42,952 | ) |
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Accumulated | ||||||||||||||||||||||||
Number | Additional | Other | Total | |||||||||||||||||||||
of Common | Common | Paid-in | Retained | Comprehensive | Shareholders' | |||||||||||||||||||
(in thousands, except share data) | Shares | Stock | Capital | Earnings | (Loss) Income | Equity | ||||||||||||||||||
Balances, December 31, 2015 | 16,514,245 | $ | 20,643 | $ | 62,059 | $ | 3,714 | $ | (61 | ) | $ | 86,355 | ||||||||||||
Net income for the period | - | - | - | 4,785 | - | 4,785 | ||||||||||||||||||
Cash dividends declared, $0.06 per share | - | - | - | (993 | ) | - | (993 | ) | ||||||||||||||||
Common shares issued under long-term incentive compensation plan | 52,848 | 66 | (66 | ) | - | - | - | |||||||||||||||||
Restricted stock awards | - | - | 195 | - | - | 195 | ||||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 47,763 | 59 | 193 | - | - | 252 | ||||||||||||||||||
Other comprehensive income, net of tax of $3,242 | - | - | - | - | 6,293 | 6,293 | ||||||||||||||||||
Balances, September 30, 2016 | 16,614,856 | $ | 20,768 | $ | 62,381 | $ | 7,506 | $ | 6,232 | $ | 96,887 | |||||||||||||
Balances, December 31, 2016 | 16,645,845 | $ | 20,807 | $ | 62,593 | $ | 8,531 | $ | (1,560 | ) | $ | 90,371 | ||||||||||||
Net income for the period | - | - | - | 6,261 | - | 6,261 | ||||||||||||||||||
Cash dividends declared, $0.09 per share | - | - | - | (1,505 | ) | - | (1,505 | ) | ||||||||||||||||
Common shares issued under long-term incentive compensation plan | 46,878 | 58 | (58 | ) | - | - | - | |||||||||||||||||
Restricted stock awards | - | - | 234 | - | - | 234 | ||||||||||||||||||
Common shares issued through dividend reinvestment / optional cash purchase plan | 65,240 | 82 | 374 | (5 | ) | - | 451 | |||||||||||||||||
Other comprehensive income, net of tax of $860 | - | - | - | - | 1,670 | 1,670 | ||||||||||||||||||
Balances, September 30, 2017 | 16,757,963 | $ | 20,947 | $ | 63,143 | $ | 13,282 | $ | 110 | $ | 97,482 |
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CONSOLIDATED STATEMENTS OF | |||||||||||||||
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Nine Months Ended | ||||||||
September 30, | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 6,261 | $ | 4,785 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Investment securities amortization, net | 756 | 880 | ||||||
Equity in trust | (7 | ) | (5 | ) | ||||
Depreciation and amortization | 1,984 | 1,973 | ||||||
Valuation adjustment for mortgage servicing rights | (4 | ) | - | |||||
Stock-based compensation expense | 234 | 195 | ||||||
Provision for loan and lease losses | 486 | 858 | ||||||
Valuation adjustment for off-balance sheet commitments | 23 | (64 | ) | |||||
Net gain on the sale of available-for-sale securities | (1,338 | ) | (960 | ) | ||||
Net gain on the sale of mortgage loans held for sale | (241 | ) | (238 | ) | ||||
Net gain on the sale of other repossessed assets | (47 | ) | - | |||||
Loss on the disposition of bank premises and equipment | 63 | - | ||||||
Net gain on the sale of SBA guaranteed loans | (79 | ) | (51 | ) | ||||
Net gain on the sale of other real estate owned | (57 | ) | (29 | ) | ||||
Valuation adjustment of other real estate owned | 307 | 170 | ||||||
Income from bank-owned life insurance | (399 | ) | (426 | ) | ||||
Proceeds from the sale of mortgage loans held for sale | 10,216 | 5,592 | ||||||
Funds used to originate mortgage loans held for sale | (9,526 | ) | (4,856 | ) | ||||
Decrease in net deferred tax assets | 2,507 | 1,611 | ||||||
Increase in accrued interest receivable | (446 | ) | (261 | ) | ||||
(Increase) decrease in prepaid expenses and other assets | (1,733 | ) | 62 | |||||
Increase (decrease) in accrued interest payable | 2 | (10,871 | ) | |||||
Decrease in accrued expenses and other liabilities | (1,552 | ) | (944 | ) | ||||
Total adjustments | 1,149 | (7,364 | ) | |||||
Net cash provided by (used in) operating activities | 7,410 | (2,579 | ) | |||||
Cash flows from investing activities: | ||||||||
Maturities, calls and principal payments of securities available for sale | 5,655 | 4,972 | ||||||
Proceeds from the sale of securities available for sale | 130,972 | 32,588 | ||||||
Purchases of securities available for sale | (133,524 | ) | (37,854 | ) | ||||
Redemption of the stock in Federal Home Loan Bank of Pittsburgh | 861 | 3,603 | ||||||
Redemption of Federal Reserve Bank stock | - | 1,351 | ||||||
Net increase in loans to customers | (30,068 | ) | (377 | ) | ||||
Proceeds from the sale of SBA guaranteed loans | 979 | 1,315 | ||||||
Proceeds from the sale of other repossessed assets | 280 | - | ||||||
Proceeds from the sale of other real estate owned | 820 | 1,903 | ||||||
Purchases of bank premises and equipment | (852 | ) | (376 | ) | ||||
Net cash (used in) provided by investing activities | (24,877 | ) | 7,125 | |||||
Cash flows from financing activities: | ||||||||
Net (decrease) increase in deposits | (31,927 | ) | 109,413 | |||||
Net proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight | - | (60,500 | ) | |||||
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term | 34,673 | 37,753 | ||||||
Repayment of Federal Home Loan Bank of Pittsburgh advances - term | (47,860 | ) | (54,218 | ) | ||||
Principal reduction on subordinated debentures | (5,000 | ) | - | |||||
Proceeds from issuance of common shares | 456 | 252 | ||||||
Discount on optional cash purchase plan | (5 | ) | - | |||||
Cash dividends paid | (1,505 | ) | (993 | ) | ||||
Net cash (used in) provided by financing activities | (51,168 | ) | 31,707 | |||||
Net (decrease) increase in cash and cash equivalents | (68,635 | ) | 36,253 | |||||
Cash and cash equivalents at beginning of period | 112,445 | 21,083 | ||||||
Cash and cash equivalents at end of period | $ | 43,810 | $ | 57,336 | ||||
Supplemental cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 3,477 | $ | 14,012 | ||||
Income taxes | 205 | - | ||||||
Other transactions: | ||||||||
Loans transferred to other real estate owned and repossessed assets | 80 | 1,210 | ||||||
Investor loans tranferred to other real estate owned or other assets, net of valuation adjustments | 30 | - | ||||||
Available-for-sale securities purchased, not settled | 6,012 | - | ||||||
Change in deferred gain on sale of other real estate owned | - | 5 |
|
(in thousands, except per share data) | Number of Common Shares | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total Shareholders' Equity | ||||||||||||||||||
For the three months ended: | ||||||||||||||||||||||||
Balances, June 30, 2022 | 19,675,557 | $ | 24,594 | $ | 77,233 | $ | 58,085 | $ | (34,400 | ) | $ | 125,512 | ||||||||||||
Net income for the period | - | - | - | 5,435 | - | 5,435 | ||||||||||||||||||
Cash dividends paid, $0.090 per share | - | - | - | (1,772 | ) | - | (1,772 | ) | ||||||||||||||||
Restricted stock awards | - | - | 112 | - | - | 112 | ||||||||||||||||||
Repurchase of common shares | (13,454 | ) | (17 | ) | (89 | ) | - | - | (106 | ) | ||||||||||||||
Common shares issued under long-term incentive compensation plan | 16,821 | 21 | 114 | - | - | 135 | ||||||||||||||||||
Common shares issued through dividend reinvestment/optional cash purchase plan | 1,550 | 2 | 11 | (11 | ) | - | 2 | |||||||||||||||||
Other comprehensive loss, net of tax of $4,712 | - | - | - | - | (17,726 | ) | (17,726 | ) | ||||||||||||||||
Balances, September 30, 2022 | 19,680,474 | $ | 24,600 | $ | 77,381 | $ | 61,737 | $ | (52,126 | ) | $ | 111,592 | ||||||||||||
Balances, June 30, 2023 | 19,750,092 | $ | 24,687 | $ | 77,757 | $ | 67,851 | $ | (46,236 | ) | $ | 124,059 | ||||||||||||
Net income for the period | - | - | - | 4,162 | - | 4,162 | ||||||||||||||||||
Cash dividends paid, $0.090 per share | - | - | - | (1,781 | ) | - | (1,781 | ) | ||||||||||||||||
Restricted stock awards | - | - | 142 | - | - | 142 | ||||||||||||||||||
Common shares issued in consideration of an asset purchase | 2,046 | 3 | 14 | - | - | 17 | ||||||||||||||||||
Common shares issued under long-term incentive compensation plan | 26,740 | 33 | 130 | - | - | 163 | ||||||||||||||||||
Common shares issued through dividend reinvestment/optional cash purchase plan | 1,439 | 2 | 7 | (11 | ) | - | (2 | ) | ||||||||||||||||
Other comprehensive loss, net of tax of $2,381 | - | - | - | - | (8,958 | ) | (8,958 | ) | ||||||||||||||||
Balances, September 30, 2023 | 19,780,317 | $ | 24,725 | $ | 78,050 | $ | 70,221 | $ | (55,194 | ) | $ | 117,802 | ||||||||||||
For the nine months ended: | ||||||||||||||||||||||||
Balances, December 31, 2021 | 19,989,875 | $ | 24,987 | $ | 80,128 | $ | 50,990 | $ | 6,352 | $ | 162,457 | |||||||||||||
Net income for the period | - | - | - | 15,526 | - | 15,526 | ||||||||||||||||||
Cash dividends paid, $0.240 per share | - | - | - | (4,748 | ) | - | (4,748 | ) | ||||||||||||||||
Restricted stock awards | - | - | 334 | - | - | 334 | ||||||||||||||||||
Repurchase of common shares | (384,830 | ) | (481 | ) | (3,155 | ) | - | - | (3,636 | ) | ||||||||||||||
Common shares issued under long-term incentive compensation plan | 71,510 | 89 | 46 | - | - | 135 | ||||||||||||||||||
Common shares issued through dividend reinvestment/optional cash purchase plan | 3,919 | 5 | 28 | (31 | ) | - | 2 | |||||||||||||||||
Other comprehensive loss, net of tax of $15,545 | - | - | - | - | (58,478 | ) | (58,478 | ) | ||||||||||||||||
Balances, September 30, 2022 | 19,680,474 | $ | 24,600 | $ | 77,381 | $ | 61,737 | $ | (52,126 | ) | $ | 111,592 | ||||||||||||
Balances, December 31, 2022 | 19,681,644 | $ | 24,602 | $ | 77,502 | $ | 64,873 | $ | (48,028 | ) | $ | 118,949 | ||||||||||||
Cumulative effect adjustment due to adoption of ASU 2016-13 | 1,080 | 1,080 | ||||||||||||||||||||||
Net income for the period | - | - | - | 9,630 | - | 9,630 | ||||||||||||||||||
Cash dividends paid, $0.270 per share | - | - | - | (5,329 | ) | - | (5,329 | ) | ||||||||||||||||
Restricted stock awards | - | - | 416 | - | - | 416 | ||||||||||||||||||
Common shares issued in consideration of an asset purchase | 4,694 | 6 | 32 | - | - | 38 | ||||||||||||||||||
Common shares issued under long-term incentive compensation plan | 85,165 | 106 | 57 | - | - | 163 | ||||||||||||||||||
Common shares issued through dividend reinvestment/optional cash purchase plan | 8,814 | 11 | 43 | (33 | ) | - | 21 | |||||||||||||||||
Other comprehensive income, net of tax of $1,904 | - | - | - | - | (7,166 | ) | (7,166 | ) | ||||||||||||||||
Balances, September 30, 2023 | 19,780,317 | $ | 24,725 | $ | 78,050 | $ | 70,221 | $ | (55,194 | ) | $ | 117,802 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
(unaudited) |
Nine Months Ended September 30, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 9,630 | $ | 15,526 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Investment securities amortization, net | 1,474 | 2,260 | ||||||
Equity in trust | (16 | ) | (7 | ) | ||||
Depreciation of bank premises and equipment | 988 | 1,163 | ||||||
Amortization of loan origination costs (fees) | 640 | (637 | ) | |||||
Valuation adjustment for loan servicing rights | - | (3 | ) | |||||
Stock-based compensation expense | 579 | 469 | ||||||
Provision for credit losses - loans and leases | 1,504 | 1,334 | ||||||
(Credit) provision for unfunded commitments | (729 | ) | 461 | |||||
Net (gain) loss on the sale of available-for-sale debt securities | (252 | ) | 35 | |||||
Net loss on equity securities | 1,773 | 121 | ||||||
Net gain on the sale of mortgage loans held for sale | (2 | ) | (123 | ) | ||||
Net gain on the sale of other real estate owned | - | (3 | ) | |||||
Income from cash surrender value of bank-owned life insurance | (612 | ) | (542 | ) | ||||
Proceeds from the sale of mortgage loans held for sale | 252 | 6,888 | ||||||
Funds used to originate mortgage loans held for sale | (190 | ) | (7,013 | ) | ||||
Loss on disposition of assets | 25 | - | ||||||
Increase in accrued interest receivable | (642 | ) | (986 | ) | ||||
Decrease (increase) in other assets | 508 | (520 | ) | |||||
Increase in accrued interest payable | 830 | 52 | ||||||
Decrease in other liabilities | (5,778 | ) | (3,652 | ) | ||||
Total adjustments | 352 | (703 | ) | |||||
Net cash provided by operating activities | 9,982 | 14,823 | ||||||
Cash flows from investing activities: | ||||||||
Maturities, calls and principal payments of available-for-sale debt securities | 32,521 | 31,942 | ||||||
Proceeds from the sale of available-for-sale debt securities | 10,394 | 2,372 | ||||||
Purchases of available-for-sale debt securities | (14,966 | ) | (61,397 | ) | ||||
Purchases of equity securities | (160 | ) | (695 | ) | ||||
Purchase of restricted stock | (297 | ) | (2,927 | ) | ||||
Net increase in loans and leases to customers | (82,925 | ) | (131,015 | ) | ||||
Proceeds from the sale of other real estate owned | - | 695 | ||||||
Purchase of bank-owned life insurance | - | (3,000 | ) | |||||
Purchases of bank premises and equipment | (187 | ) | (607 | ) | ||||
Net cash used in investing activities | (55,620 | ) | (164,632 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 81,728 | 47,598 | ||||||
Net (decrease) increase in Federal Home Loan Bank of Pittsburgh advances - overnight | (104,400 | ) | 65,700 | |||||
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term | 303,873 | 10,000 | ||||||
Repayment of Federal Home loan Bank of Pittsburgh advances - term | (195,100 | ) | (30,000 | ) | ||||
Proceeds from Federal Reserve Discount Window advances | 25,000 | - | ||||||
Repayment of Federal Reserve Discount Window advances | (25,000 | ) | - | |||||
Repurchase of common shares | - | (3,636 | ) | |||||
Proceeds from issuance of common shares, net of discount | 21 | 2 | ||||||
Cash dividends paid | (5,329 | ) | (4,748 | ) | ||||
Net cash provided by financing activities | 80,793 | 84,916 | ||||||
Net increase (decrease) in cash and cash equivalents | 35,155 | (64,893 | ) | |||||
Cash and cash equivalents at beginning of period | 41,916 | 99,020 | ||||||
Cash and cash equivalents at end of period | $ | 77,071 | $ | 34,127 | ||||
Supplemental cash flow information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 23,681 | $ | 2,848 | ||||
Taxes | 2,500 | 3,350 | ||||||
Other transactions: | ||||||||
Lease liabilities from obtaining right-of use assets | 19 | - | ||||||
Common shares issued in consideration of an asset purchase | 38 | - |
The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(unaudited)
Note 1. Basis of Presentation
The consolidated financial statements of FNCB Bancorp, Inc. are comprised of the accounts of FNCB Bancorp, Inc., a registered bank holding company under the Bank Holding Company Act of 1956,and its wholly-ownedwholly owned subsidiary, FNCB Bank (the “Bank”), as well as the Bank’s wholly-owned subsidiaries (collectively,(and collectively, “FNCB”). The accounting and reporting policies of FNCB conform to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q10-Q and Article 10-0110-01 of Regulation S-X.S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. Prior period amounts have been reclassified when necessary to conform to the current period’s presentation. Such reclassifications did not have an impact on the operating results or financial position of FNCB. The operating results and financial position of FNCB for the three and nine months ended September 30, 2017, 2023may not be indicative of future results of operations and financial position.
TheIn addition, the preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term are the allowance for loan and leasecredit losses (“ALLL”ACL”), securities’ valuation and impairment evaluation the valuation of other real estate owned (“OREO”),for credit impairment and income taxes.
Since 2021, the Bank has provided commercial equipment financing under the brand 1st Equipment Finance. On June 5, 2023, the Bank filed a Bank Subsidiary Notice with the Pennsylvania Department of Banking and Supervision (“PADOBS”) to inform the PADOBS that the Bank plans to establish 1st Equipment Finance, Inc. as a wholly-owned subsidiary for the purpose of providing commercial equipment loans and leases to customers. On July 5, 2023, the Bank received written notification from the PADOBS that it does not object to the establishment of the subsidiary pursuant to Section 203(d) of the Pennsylvania Banking Code of 1965, and the establishment of the subsidiary must be completed by January 2, 2024. On October 1, 2023, 1st Equipment Finance, Inc. was established as a wholly-owned subsidiary of the Bank. Upon establishment of the subsidiary, the Bank contributed capital to the new subsidiary which included the outstanding balance of loans and leases previously originated under this brand, accrued interest and furniture and equipment totaling $160.5 million.
Agreement and Plan of Merger:
On September 27, 2023, FNCB entered into an Agreement and Plan of Merger (the "Merger Agreement") with Peoples Financial Services Corp. (“PFIS”) pursuant to which FNCB will merge with and into PFIS, with PFIS as the surviving entity. Immediately after such merger, the Bank will merge with and into Peoples Security Bank and Trust Company ("Peoples Bank"), with Peoples Bank as the surviving bank and a wholly-owned subsidiary of PFIS. Under the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, shareholders of FNCB will be entitled to receive a fixed exchange ratio of 0.1460 shares of PFIS common stock for each share of the FNCB’s common stock. On October 27, 2023, FNCB filed a Federal Deposit Insurance Corporation ("FDIC") Interagency Bank Merger Application with the FDIC New York and a Pennsylvania Bank Merger Application with the Pennsylvania Department of Banking and Securities. Completion of the merger requires, among other things, the approval from these regulatory authorities, as well as FNCB’s shareholders.
The Merger Agreement provides certain termination rights for both PFIS and FNCB and further provides that a termination fee of $4.8 million will be payable by either PFIS or FNCB, as applicable, upon termination of the Merger Agreement under certain circumstances. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Definitive Merger Agreement filed by FNCB as Exhibit 2.1 to the Current Report on Form 8-K on September 27, 2023. Pending regulatory and shareholder approvals, FNCB expects the merger to be consummated by April 1, 2024, however, there can be no assurance that the transaction will be consummated by such date, or at all.
Subsequent Events:
In addition to the establishment of 1st Equipment Finance, Inc. as a subsidiary of the Bank mentioned above, FNCB has evaluated events and transactions occurring subsequent to September 30, 2023, the balance sheet date, for items that could potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the issuance date of these consolidated financial statements. See Note 12, “Regulatory Matters” for information about events and transactions that have occurred subsequent to the balance sheet date.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in FNCB’s audited consolidated financial statements, included in the Annual Report filed on Form 10-K10-K as of and for the year ended December 31, 2016.2022 (the “2022 Annual Report”).
Note 2. Summary of Significant Accounting Policies/New Authoritative Accounting Guidance
The disclosures below update and supplement the accounting policies previously disclosed in Note 2, "Summary of Significant 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 SubtopicsPolicies" included in the Codification2022 Annual Report 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. On August 12, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): “Deferral of the Effective Date,” which defersreflect the adoption of ASU 2014-09 until the interim and annual reporting periods beginning after December 15, 2017. 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. 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. Deposit-related service charges and gains and losses on the sales of foreclosed real estate are two revenue streams that fall within the scope of ASU 2014-09. Management is currently cataloguing and evaluating all of FNCB’s non-interest revenue streams, including, but not limited to, deposit-related services charges and gains and losses from the sales of foreclosed real estate, using the five-step, contract-based approach to determine applicability to ASU 2014-09 and is reviewing current policies and practices to identify any differences with the new guidance. Management does not expect the adoption of this ASU to have a material impact 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 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 2016-13,Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326)326): “Measurement of Credit Losses on Financial Instruments,” replacesby FNCB on January 1, 2023. ASU 2016-13 is also commonly referred to as Accounting Standards Codification ("ASC") 326 or Current Expected Credit Losses ("CECL").
ACL on Debt Securities: The ACL is a valuation account that is deducted from 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 atpresent the net amount expected to be collected.collected on the held-to-maturity portfolio. At September 30, 2023, FNCB had no securities classified as held-to-maturity.
Upon adoption of ASU 2016-13, management no longer evaluates securities for other than temporary impairment ("OTTI"), as ASC Subtopic 326-30, "Financial Instruments—Credit Losses—Available-for-Sale Debt Securities," changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party credit support, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow ("DCF")
method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance on available-for-sale debt securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive (loss) income.
FNCB’s estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. However, FNCB does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Management does not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the security but, instead, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral. FNCB performed an analysis that determined that the following securities have a zero expected credit loss: U.S. government agencies, mortgage-backed securities of U.S. government and government-sponsored agencies, as all of the U.S. government agencies and U.S. government agency backed securities have the full faith and credit backing of the United States Government or one of its agencies.
The allowance on available-for-sale debt securities may be in full or a portion hereof and is recorded as an expense (credit) within the provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed based on the above-described analysis. As of September 30, 2023 and January 1, 2023 (i.e. ASU 2016-13 adoption), there was no allowance established for FNCB's available-for-sale debt securities.
Loans and Leases: FNCB reports loans and leases held in the portfolio at amortized cost. Amortized cost is the principal balance outstanding net of the unamortized balance of any deferred fees or costs and the unamortized balance of any premiums or discounts on loans purchased through third-party originators.
Generally, for originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual term of the loan using the level-yield method over the estimated lives of the related loans. When a loan is paid off, the unamortized portion of deferred fees or costs are recognized in interest income. Interest income on originated loans is accrued based upon the daily principal amount outstanding except for loans on non-accrual status.
For purchased loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized based on the acquisition date fair value. When a loan is paid off, the unamortized portion of any premiums or discounts on loans are recognized in interest income.
ACL on Loans and Leases: The ACL on the loan portfolio is a significant accounting estimate used in the preparation of the FNCB's consolidated financial statements. Upon adoption of ASU 2016-13, FNCB replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. The allowance is comprised of reserves measured on a collective or pool basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Arriving at an appropriate level of ACL involves a high degree of judgment. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance.
FNCB estimates expected credit losses using the DCF method for all loan portfolio segments measured on a collective or pool basis. For each loan segment, a cash flow projection is generated at the instrument level. A default rate and loss given default assumption are applied to the pool’s projective model of cash flows taking into consideration the effects of prepayments and principal curtailment effects. The analysis produces expected cash flows for each instrument in the pool by pairing loan-level term information (maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (default rates and prepayment speeds).
Management has determined that peer loss experience provides the best basis for its assessment of expected credit losses to determine the ACL. FNCB utilizes peer call report data to measure historical credit loss experience with similar risk characteristics within the segments over an economic cycle. Management reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Management also considered further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For all segment models for collectively evaluated loans, FNCB incorporates one macroeconomic driver, the national unemployment rate, using a statistical regression modeling methodology. Management determined that four quarters currently represents a reasonable and supportable forecast period. For the contractual term that extend beyond the reasonable and supportable forecast period, FNCB reverts to historical loss information within eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.
Management also considers certain qualitative factors in its evaluation of expected credit losses, these factors include: (i) changes in the credit quality trends of a respective segment which may be measured by risk ratings, FICO scores, delinquency rates, and payment performance, (ii) changes in independent third-party loan reviews and regulatory exam ratings, (iii) changes in local unemployment rates, (iv) portfolio segment growth rates and concentrations, and (v) other external factors that may affect bank lending and operations such as a pandemic, natural disaster, or loss of a major employer, among others.
Individually Evaluated Loans: Prior to the adoption of ASU 2016-13 on January 1, 2023, a loan was individually evaluated when the loan was considered impaired. A loan was considered to be impaired when based on current information and events, it was probable that FNCB would not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.
With the adoption of ASU 2016-13, loans that do not share risk characteristics with existing pools are evaluated on an individual basis. FNCB considers a loan to be collateral dependent when management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the financial asset to expected to be provided substantially through the operation or sale of the collateral. When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Accrued Interest: Upon adoption of ASU 2016-13 on January 1, 2023, FNCB made the following elections regarding accrued interest receivable: (i) present accrued interest receivable balances separately on the consolidated statements of condition; (ii) exclude accrued interest from the measurement of the ACL, including investments and loans; and (iii) continue to write-off accrued interest receivable by reversing interest income when a loan is placed on non-accrual. FNCB's policy is to write-off accrued interest when a loan is placed on non-accrual. Historically, FNCB has not experienced uncollectible accrued interest receivable on investment debt securities.
ACL for Unfunded Commitments: The exposure is a component of other liabilities on FNCB’s consolidated statement of financial condition and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unused portions of lines of credit, availability on construction and land development loans and standby and commercial letters of credit. The process used to determine the ACL for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge (credit) to provision for unfunded commitments on the consolidated statements of income is made to account for the change in the ACL on unfunded commitment exposures between reporting periods.
New Authoritative Accounting Guidance
On January 1, 2023, FNCB adopted ASU 2016-13. ASU 2016-13 significantly changed the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. FNCB applied the new guidance using the modified-retrospective approach. Related to the implementation of ASU 2016-13, FNCB recorded a reduction in the ACL on loans and leases of $2.6 million, additional reserves for unfunded commitments of $1.3 million, a reduction in deferred tax assets of $287 thousand, and an increase to retained earnings of $1.1 million. The adoption of ASU 2013-16 did not have a material effect on FNCB's available-for-sale debt securities.
The following table below presents the impact of ASU 2016-13 on the consolidated statements of financial condition:
January 1, 2023 | ||||||||||||
(in thousands) | As reported Under ASU 2016-13 | Pre-ASU 2016-13 | Impact of ASU 2016-13 | |||||||||
Assets: | ||||||||||||
ACL on loans and leases: | ||||||||||||
Residential real estate | $ | (1,187 | ) | $ | (2,215 | ) | $ | 1,028 | ||||
Commercial real estate | (2,579 | ) | (4,193 | ) | 1,614 | |||||||
Construction, land acquisition and development | (1,814 | ) | (747 | ) | (1,067 | ) | ||||||
Commercial and industrial | (3,887 | ) | (4,099 | ) | 212 | |||||||
Consumer | (1,677 | ) | (1,307 | ) | (370 | ) | ||||||
State and political subdivisions | (413 | ) | (503 | ) | 90 | |||||||
Unallocated | - | (1,129 | ) | 1,129 | ||||||||
Total ACL on loans | $ | (11,557 | ) | (14,193 | ) | $ | 2,636 | |||||
Deferred income taxes | $ | 15,759 | $ | 16,046 | $ | (287 | ) | |||||
Liabilities: | ||||||||||||
Liability for credit losses for unfunded commitments | $ | (2,217 | ) | $ | (948 | ) | $ | (1,269 | ) | |||
Shareholders' equity: | ||||||||||||
Retained earnings | $ | (65,953 | ) | $ | (64,873 | ) | $ | (1,080 | ) |
On January 1, 2023, FNCB adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): "Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 eliminates the troubled debt restructuring ("TDR") recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments in this update affectalso enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, holding financial assetsthese amendments require that an entity disclose current-period gross charge-offs by year of origination for financing receivables 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 fromwithin the scope that haveof Subtopic 326-20. Gross charge-off information must be included in 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 effectivevintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that are U.S. Securitiesan entity disclose the amortized cost basis of financing receivables by credit quality indicator 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 asclass 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 comprisedfinancing receivable by year of members of its finance, credit administration, lending, internal audit, loan operations and information systems units. The CECL task group has become familiar with the provisions of ASU 2016-13 and is in the process of planning and preparing for the transition to the new guidance, which includes, but is not limited to: (1) developing an appropriate course of action for FNCB taking into consideration the nature, scope and risk of its lending and investing activities; (2) identifying segments and sub-segments within the loan portfolio that have similar risk characteristics; (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 implementing changes that are necessary to its core operating system and interfaces to be able to capture data requirements; 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.origination.
Refer to Note 2 to FNCB’sFNCB’s consolidated financial statements included in the 20162022 Annual Report on Form 10-K and the Quarterly Report on Form 10-Q for the periods ended March 31, 2017 and June 30, 2017 for a discussion of additional accounting guidance applicable to FNCB that will be adopted in future periods.
Note 3. Securities
Note 3.Available-for-Sale Debt Securities
During the third quarter of 2017, management identified two subordinated notes issued by other financial institutions in the amount of $1.0 million each and $1.0 million in mandatory-redeemable preferred stock of a subsidiary of another financial institution that were included in loans receivable at December 31, 2016 and 2015. Management determined that these financial instruments are in fact securities and upon identification reclassified the recorded investment in these instruments of $3.0 million from loans receivable to available-for-sale securities. Management also conducted an assessment of materiality of the reclassification to determine if FNCB’s previously-issued consolidated financial statements should be amended. Based on its qualitative and quantitative assessment of materiality, management determined that the reclassification did not have a material impact to FNCB’s financial position or results of operations as of and for the years ended December 31, 2016 and 2015, including the interim periods within those years. In addition, the reclassification did not have a material impact to FNCB’s financial position or results of operations as of and for the interim periods ended March 31, 2017 and June 30, 2017. Accordingly, management concluded that FNCB’s previously-issued consolidated financial statements and notes to the consolidated financial statements could still be relied upon. However, management has elected to correct the error in these current-period consolidated financial statements and notes to the consolidated financial statements by adjusting the prior-period information for comparability. Management engaged an independent third party to conduct a valuation of and provide fair values for these available-for-sale securities as of September 30, 2017, December 31, 2016, December 31, 2015 and for each quarterly period-end of 2017 and 2016. Based on the valuations, management adjusted these available-for-sale securities to fair value at December 31, 2016 and 2015 and each of the quarter-end periods of 2017 and 2016. Specifically, these reclassifications and valuations resulted in the following adjustments to balances included in previously-issued consolidated statements of financial position at December 31, 2016 and 2015 of: 1) increases to securities available for sale of $3.3 million, or 1.22%, and $3.3 million, or 1.29%; 2) decreases to loans, net of the allowance for loan and lease losses of $3.0 million, or 0.41%, for both period ends; 3) increases to total capital, specifically accumulated other comprehensive income, net of income taxes, of $224 thousand, or 0.25%, and $178 thousand, or 0.21%; and 4) decreases to net deferred tax assets of $115 thousand, or 0.43%, and $91 thousand, or 0.32%, respectively. Adjustments to these balances at each of the quarter-end periods of 2017 and 2016 were comparable to those made at December 31, 2016 and 2015, which management has deemed to be immaterial. These reclassifications and valuations had no effect on the consolidated statements of income, the consolidated statements of cash flows, or on earnings per share for the annual and interim periods of 2016 and interim periods of 2017.
During the nine months ended September 30, 2017, FNCB purchased $2.0 million in the subordinated notes of another financial institution. FNCB has classified the subordinated notes and mandatory-redeemable preferred stock as corporate debt securities within its available-for-sale securities portfolio.
The following tables present thethe amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s available-for-sale debt securities at September 30, 20172023 and December 31, 2016:2022:
September 30, 2017 | September 30, 2023 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||||||||||||||||||
Amortized | Holding | Holding | Fair | Amortized | Holding | Holding | Fair | |||||||||||||||||||||||||
(in thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
Available-for-sale: | ||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||
U.S. treasuries | $ | 36,839 | $ | - | $ | 4,896 | $ | 31,943 | ||||||||||||||||||||||||
Obligations of state and political subdivisions | 144,518 | 1,207 | 1,025 | 144,700 | 224,001 | - | 33,662 | 190,339 | ||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 35,216 | 221 | 165 | 35,272 | 89,010 | - | 15,719 | 73,291 | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 67,103 | 7 | 651 | 66,459 | 3,622 | - | 317 | 3,305 | ||||||||||||||||||||||||
Mortgage-backed securities | 22,335 | 258 | 71 | 22,522 | 19,616 | - | 3,485 | 16,131 | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 78,894 | 57 | 9,018 | 69,933 | ||||||||||||||||||||||||||||
Corporate debt securities | 5,000 | 445 | - | 5,445 | 35,070 | - | 4,392 | 30,678 | ||||||||||||||||||||||||
Asset-backed securities | 3,517 | 6 | 11 | 3,512 | 20,945 | 89 | 170 | 20,864 | ||||||||||||||||||||||||
Negotiable certificates of deposit | 3,172 | 20 | - | 3,192 | 744 | - | 86 | 658 | ||||||||||||||||||||||||
Equity securities | 1,010 | - | 75 | 935 | ||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 281,871 | $ | 2,164 | $ | 1,998 | $ | 282,037 | ||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 508,741 | $ | 146 | $ | 71,745 | $ | 437,142 |
December 31, 2016 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | Fair | |||||||||||||
(in thousands) | Cost | Gains | Losses | Value | ||||||||||||
Available-for-sale: | ||||||||||||||||
Obligations of U.S. government agencies | $ | 12,152 | $ | 36 | $ | - | $ | 12,188 | ||||||||
Obligations of state and political subdivisions | 119,919 | 257 | 2,303 | 117,873 | ||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||
Collateralized mortgage obligations - residential | 17,969 | 155 | 40 | 18,084 | ||||||||||||
Collateralized mortgage obligations - commercial | 100,064 | 154 | 868 | 99,350 | ||||||||||||
Mortgage-backed securities | 20,593 | 159 | 176 | 20,576 | ||||||||||||
Corporate debt securities | 3,500 | 339 | 47 | 3,792 | ||||||||||||
Asset-backed securities | - | - | - | - | ||||||||||||
Negotiable certificates of deposit | 3,172 | 44 | - | 3,216 | ||||||||||||
Equity securities | 1,010 | - | 74 | 936 | ||||||||||||
Total available-for-sale securities | $ | 278,379 | $ | 1,144 | $ | 3,508 | $ | 276,015 |
December 31, 2022 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | |||||||||||||||
Amortized | Holding | Holding | Fair | |||||||||||||
(in thousands) | Cost | Gains | Losses | Value | ||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
U.S. treasuries | $ | 36,801 | $ | - | $ | 4,667 | $ | 32,134 | ||||||||
Obligations of state and political subdivisions | 250,244 | 90 | 29,552 | 220,782 | ||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||
Collateralized mortgage obligations - residential | 93,577 | - | 13,170 | 80,407 | ||||||||||||
Collateralized mortgage obligations - commercial | 3,649 | - | 320 | 3,329 | ||||||||||||
Mortgage-backed securities | 23,332 | 1 | 2,670 | 20,663 | ||||||||||||
Private collateralized mortgage obligations | 80,648 | - | 8,141 | 72,507 | ||||||||||||
Corporate debt securities | 33,630 | - | 2,958 | 30,672 | ||||||||||||
Asset-backed securities | 15,287 | 5 | 351 | 14,941 | ||||||||||||
Negotiable certificates of deposit | 744 | - | 88 | 656 | ||||||||||||
Total available-for-sale debt securities | $ | 537,912 | $ | 96 | $ | 61,917 | $ | 476,091 |
Except for securities of U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders’shareholders’ equity at September 30, 2017.
At September 30, 20172023 and December 31, 2016, securities with a carrying amount of $266.1 million and $271.3 million, respectively, were pledged as collateral to secure public deposits and for other purposes.2022.
The following table showspresents the amortized cost and approximate fair valuematurity information of FNCB’s available-for-sale debt securities at September 30, 2017 by contractual maturity.2023. Expected maturities will differ from contractual maturitymaturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because collateralized mortgage obligations ("CMOs"), mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary:summary.
September 30, 2017 | September 30, 2023 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(in thousands) | Cost | Value | Cost | Value | ||||||||||||
Amounts maturing in: | ||||||||||||||||
One year or less | $ | 248 | $ | 248 | $ | 13,428 | $ | 13,257 | ||||||||
After one year through five years | 29,192 | 29,367 | 82,337 | 75,279 | ||||||||||||
After five years through ten years | 122,250 | 122,377 | 92,153 | 76,522 | ||||||||||||
After ten years | 1,000 | 1,345 | 108,736 | 88,560 | ||||||||||||
Mortgage-backed securities | 19,616 | 16,131 | ||||||||||||||
Collateralized mortgage obligations | 171,526 | 146,529 | ||||||||||||||
Asset-backed securities | 3,517 | 3,512 | 20,945 | 20,864 | ||||||||||||
Collateralized mortgage obligations | 102,319 | 101,731 | ||||||||||||||
Mortgage-backed securities | 22,335 | 22,522 | ||||||||||||||
Total | $ | 280,861 | $ | 281,102 | ||||||||||||
Total available-for-sale debt securities | $ | 508,741 | $ | 437,142 |
GrossThe following table presents the gross proceeds from the sale of available-for-sale securities were $54.5 millionreceived, and $131.0 million for the threegross realized gains and nine months ended September 30, 2017, respectively, with gross gains of $0.4 million and $1.4 million, respectively realized upon the sales. Gross losses, realized upon the sales were $24 thousand and $67 thousand for the three and nine months ended September 30, 2017.
There were noon sales of available-for-sale debt securities for the three and nine months ended September 30, 2016. Gross proceeds from the sale of available-for-sale securities were $32.6 million for the nine months ended September 30, 2016, with gross gains of $960 thousand realized upon the sales. There were no2023 and 2022. Gains and losses realized upon theon sales of available-for-sale debt securities forare included in non-interest income in the nine months ended September 30, 2016.consolidated statements of income.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
Gross proceeds received on sales | $ | - | $ | - | $ | 10,394 | $ | 2,372 | ||||||||
Gross realized gains | - | - | 252 | - | ||||||||||||
Gross realized losses | - | - | - | (35 | ) |
The
The following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities within an unrealized lossesloss position at September 30, 20172023 and December 31, 2016,2022, aggregated by investment category and length of time the securities have been in an unrealized loss position:position.
September 30, 2017 | September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Gross | Number | Gross | Number | Gross | Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of US government agencies | - | $ | - | $ | - | - | $ | - | $ | - | - | $ | - | $ | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and policitical subdivisions | 33 | 36,928 | 474 | 16 | 15,302 | 551 | 49 | 52,230 | 1,025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. treasuries | - | $ | - | $ | - | 17 | $ | 31,943 | $ | 4,896 | 17 | $ | 31,943 | $ | 4,896 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 3 | 3,425 | 175 | 198 | 186,134 | 33,487 | 201 | 189,559 | 33,662 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 6 | 17,596 | 165 | 1 | 77 | - | 7 | 17,673 | 165 | - | - | - | 42 | 73,291 | 15,719 | 42 | 73,291 | 15,719 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 19 | 63,381 | 651 | - | - | - | 19 | 63,381 | 651 | - | - | - | 3 | 3,305 | 317 | 3 | 3,305 | 317 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 5 | 6,205 | 71 | - | - | - | 5 | 6,205 | 71 | 3 | 3,705 | 310 | 12 | 12,426 | 3,175 | 15 | 16,131 | 3,485 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Private collateralized mortgage obligations | 7 | 8,970 | 336 | 50 | 56,857 | 8,682 | 57 | 65,827 | 9,018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | - | - | - | - | - | - | - | - | - | 1 | 1,448 | 52 | 29 | 29,230 | 4,340 | 30 | 30,678 | 4,392 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities | 1 | 2,768 | 11 | - | - | - | 1 | 2,768 | 11 | 2 | 3,933 | 22 | 10 | 10,107 | 148 | 12 | 14,040 | 170 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negotiable certificates of deposit | - | - | - | - | - | - | - | - | - | - | - | - | 3 | 658 | 86 | 3 | 658 | 86 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | - | - | - | 1 | 925 | 75 | 1 | 925 | 75 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 64 | $ | 126,878 | $ | 1,372 | 18 | $ | 16,304 | $ | 626 | 82 | $ | 143,182 | $ | 1,998 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total available-for-sale debt securities | 16 | $ | 21,481 | $ | 895 | 364 | $ | 403,951 | $ | 70,850 | 380 | $ | 425,432 | $ | 71,745 |
December 31, 2016 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Gross | Number | Gross | Number | Gross | Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | - | $ | - | $ | - | - | $ | - | $ | - | - | $ | - | $ | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and policitical subdivisions | 82 | 88,479 | 2,303 | - | - | - | 82 | 88,479 | 2,303 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. treasuries | - | $ | - | $ | - | 17 | $ | 32,134 | $ | 4,667 | 17 | $ | 32,134 | $ | 4,667 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 128 | 146,932 | 12,751 | 94 | 69,872 | 16,801 | 222 | 216,804 | 29,552 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 2 | 4,514 | 40 | 1 | 175 | - | 3 | 4,689 | 40 | 16 | 26,826 | 3,407 | 26 | 53,581 | 9,763 | 42 | 80,407 | 13,170 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 17 | 70,146 | 868 | - | - | - | 17 | 70,146 | 868 | 2 | 1,911 | 94 | 1 | 1,418 | 226 | 3 | 3,329 | 320 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 5 | 6,495 | 176 | - | - | - | 5 | 6,495 | 176 | 7 | 8,569 | 219 | 7 | 11,998 | 2,451 | 14 | 20,567 | 2,670 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Private collateralized mortgage obligations | 29 | 27,705 | 1,213 | 28 | 42,819 | 6,928 | 57 | 70,524 | 8,141 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | - | - | - | 1 | 453 | 47 | 1 | 453 | 47 | 18 | 21,325 | 1,805 | 11 | 9,347 | 1,153 | 29 | 30,672 | 2,958 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | - | - | - | - | - | 5 | 7,295 | 179 | 5 | 3,988 | 172 | 10 | 11,283 | 351 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negotiable certificates of deposit | - | - | - | - | - | - | - | - | - | - | - | - | 3 | 656 | 88 | 3 | 656 | 88 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity securities | - | - | - | 1 | 926 | 74 | 1 | 926 | 74 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 106 | $ | 169,634 | $ | 3,387 | 3 | $ | 1,554 | $ | 121 | 109 | $ | 171,188 | $ | 3,508 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total available-for-sale debt securities | 205 | $ | 240,563 | $ | 19,668 | 192 | $ | 225,813 | $ | 42,249 | 397 | $ | 466,376 | $ | 61,917 |
ManagementEvaluation for Credit Impairment
Quarterly, or more frequently if market conditions warrant, management evaluates individualsecurities for impairment where there has been a decline in fair value of a security below its amortized cost basis to determine whether the decline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit related factors. At September 30, 2023, there were 380 securities in an unrealized loss position. FNCB expects to recover the amortized cost basis of all available-for-sale debt securities in an unrealized loss position quarterly for otherat September 30, 2023. Furthermore, FNCB does not intend to sell, nor is it more likely than temporary impairment (“OTTI”).not that it would be required to sell, any security in an unrealized loss position prior to recovery of its amortized cost. As part of its evaluation, management considers,considered, among other things, the length of time a security’s fair value is less than its amortized cost, the severity of decline, any credit deteriorationadverse conditions related to the security, an industry or geographic area, any adverse changes to the rating of the issuer,any security by a rating agency, whether or not management intends any issuer has failed to sell the security,make contractual principal and whether it is more likely than notinterest payments, or if there are any indications that FNCB willan issuer would not be requiredable to sell the security prior to recovery of its amortized cost.make future contractual principal and interest payments.
There were 82 securities in an unrealized loss position at September 30, 2017, including 49 obligations of state and political subdivisions, 31 securities issued by a U.S. government or government-sponsored agency, one asset-backed security, and one equity security. Management performed a review of all securities in an unrealized loss position as of September 30, 2017,2023 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 September 30, 2017. 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.2023. Based on the results of its review and considering the attributes of these debt and equity securities, management concluded that changes in the individualfair values of the securities were consistent with movements in market interest rates and spreads relative to when the securities were purchased and not due to the credit quality of the securities or issuers. Accordingly, management determined that FNCB was not required to establish an ACL for any security in an unrealized losses were temporary and OTTI did not existloss position at September 30, 2017.2023.
InvestmentEquity Securities
Included in equity securities with readily determinable fair values at September 30, 2023 and December 31, 2022 were investments in the Federal Home Loan Bank (“FHLB”)common or preferred stock of Pittsburgh stock has limited marketabilitypublicly traded bank holding companies and is carried at cost. FNCB’san investment in FHLBa mutual fund comprised of Pittsburgh stock totaled $2.5 million1-4 family residential mortgage-backed securities collateralized by properties within FNCB’s market area. Equity securities with readily determinable fair values are reported at fair value with net unrealized gains and $3.3 million at losses recognized in the consolidated statements of income.
The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the three and nine months ended September 30, 2017 2023 and December 31, 2016, respectively. Management noted no indicators of impairment for the FHLB of Pittsburgh stock at September 30, 2017 and December 31, 2016.2022.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net (losses) gains recognized on equity securities | $ | (233 | ) | $ | 86 | $ | (1,773 | ) | $ | (121 | ) | |||||
Less: net (losses) gains realized on equity securities sold | - | - | - | - | ||||||||||||
Unrealized (losses) gains on equity securities | $ | (233 | ) | $ | 86 | $ | (1,773 | ) | $ | (121 | ) |
Equity Securities without Readily Determinable Fair Values
During the third quarterAt September 30, 2023 and December 31, 2022, equity securities without readily determinable fair values consisted of 2017, FNCB purchased $1.2 million, representing approximately 4.9%, of the commona $500 thousand investment in a fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company.company, which is included in other assets in the consolidated statement of financial condition. The commonpreferred stock was purchased as partpays quarterly dividends at an annual rate of a private placement pursuant to an exemption from the registration requirements8.25%. The preferred stock of the Securities Act of 1933 for offerings not involving any public offering. The common stockthis bank holding company is not currently traded on any established market and is not expected to be traded in the near future on any securities exchange or established over-the-counter market. FNCB has elected to accountaccounted for this transaction as an investment in an equity security without a readily determinable fair value. AnUnder GAAP, an equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired, and the fair value of the investment is less than its carrying value. The $1.2 million investment is included in other assets in the consolidated statementsAs part of financial condition at September 30, 2017. Managementits qualitative assessment, management engaged an independent third party to provide a valuationvaluations of this investment as of September 30, 2017. The valuation2023 and December 31, 2022, which indicated that the investment was not impaired and accordingly, impaired. Accordingly, management determined that no adjustment for impairment iswas required at September 30, 2017.2023 and December 31, 2022.
Restricted Stock
The following table presents FNCB's investment in restricted stock at September 30, 2023 and December 31, 2022. Restricted stock has limited marketability and is carried at cost. Management noted no indicators of impairment for the Federal Home Loan Bank ("FHLB") of Pittsburgh and Atlantic Community Bankers Bank stock at either September 30, 2023 or December 31, 2022.
Note 4. Loans and Leases |
|
The following table summarizes loans receivable, net,and leases by category portfolio segment at September 30, 20172023 and December 31, 2016:2022. In accordance with the adoption of ASU 2016-13, as of September 30, 2023, the table presents the amortized cost basis of each portfolio segment, which includes net deferred costs of $2.4 million, unearned income of $952 thousand and unamortized premiums on purchased loans of $199 thousand. FNCB does not include accrued interest receivable in amortized cost basis for loans disclosed throughout this footnote. As of September 30, 2023 and December 31, 2022, accrued interest receivable for loans was $3.2 million and $2.1 million, respectively, and is included in "accrued interest receivable" in the consolidated statements of financial condition.
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | 2023 | 2022 | ||||||||||||
Residential real estate | $ | 152,257 | $ | 144,260 | $ | 244,762 | $ | 250,221 | ||||||||
Commercial real estate | 253,791 | 243,830 | 379,663 | 376,976 | ||||||||||||
Construction, land acquisition and development | 26,805 | 18,357 | 73,265 | 66,555 | ||||||||||||
Commercial and industrial | 146,048 | 150,758 | 348,749 | 272,024 | ||||||||||||
Consumer | 138,734 | 127,844 | 88,084 | 92,612 | ||||||||||||
State and political subdivisions | 39,271 | 43,709 | 71,229 | 64,955 | ||||||||||||
Total loans, gross | 756,906 | 728,758 | ||||||||||||||
Total loans and leases | 1,205,752 | 1,123,343 | ||||||||||||||
Unearned income | (84 | ) | (48 | ) | - | (810 | ) | |||||||||
Net deferred loan costs | 2,667 | 2,569 | ||||||||||||||
Allowance for loan and lease losses | (8,862 | ) | (8,419 | ) | ||||||||||||
Loans, net | $ | 750,627 | $ | 722,860 | ||||||||||||
Net deferred origination fees | - | 1,784 | ||||||||||||||
Allowance for credit losses | (12,149 | ) | (14,193 | ) | ||||||||||||
Net loans and leases | $ | 1,193,603 | $ | 1,110,124 |
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 7,9, “Related Party Transactions” to these consolidated financial statements.
During the three and nine months ended at September 30, 2017, FNCB sold the guaranteed2023. At December 31, 2022, there were $60 thousand in 1- 4 family residential mortgage loans held for sale.
The unpaid principal balance of loans that were guaranteed byserviced for others, which includes residential mortgages sold on the Small Business Administration (“SBA”) totaling $322 thousandsecondary market and $900 thousand, respectively. Net gains realized upon the sales and included in non-interest income totaled $23 thousand and $79 thousand for the three and nine months ended SBA-guaranteed loans, was $73.0 million at September 30, 2017, respectively. FNCB retained the servicing rights on these loans. Net gains realized upon the sales of SBA guaranteed loans for the three2023 and nine months ended September 30, 2016 totaled $51 thousand.
FNCB does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, and bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.
There were no material changes to the risk characteristics of FNCB’s loan segments, loan classification and credit grading systems and methodology for determining the adequacy of the ALLL during the nine months ended September 30, 2017. Refer to Note 2, “Summary of Significant Accounting Policies” to FNCB’s consolidated financial statements included in the 2016 Annual Report on Form 10-K for information about the risk characteristics related to FNCB’s loan segments, loan classification and credit grading systems and methodology for determining the adequacy of the ALLL.
Each quarter, management evaluates the ALLL and adjusts the ALLL as appropriate through a provision or credit for loan losses. While management uses the best information available to make evaluations, future adjustments to the ALLL may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of its examination process, bank regulators periodically review the ALLL. These regulators may require FNCB to adjust the ALLL based on their analysis of information available$78.7 million at the time of examination.
The following table summarizes activity in the ALLL by loan category for the three and nine months ended September 30, 2017 and 2016:
Real Estate | ||||||||||||||||||||||||||||||||
Residential | Commercial | Construction, Land Acquisition and | Commercial | State and Political | ||||||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
Three months ended September 30, 2017: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, July 1, 2017 | $ | 1,148 | $ | 3,022 | $ | 236 | $ | 2,313 | $ | 1,442 | $ | 308 | $ | - | $ | 8,469 | ||||||||||||||||
Charge-offs | (32 | ) | (85 | ) | - | (128 | ) | (132 | ) | - | - | (377 | ) | |||||||||||||||||||
Recoveries | 16 | 38 | - | 125 | 48 | - | - | 227 | ||||||||||||||||||||||||
Provisions (credits) | 46 | 328 | 41 | 53 | 75 | - | - | 543 | ||||||||||||||||||||||||
Ending balance, September 30, 2017 | $ | 1,178 | $ | 3,303 | $ | 277 | $ | 2,363 | $ | 1,433 | $ | 308 | $ | - | $ | 8,862 | ||||||||||||||||
Three months ended September 30, 2016: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, July 1, 2016 | $ | 1,099 | $ | 3,095 | $ | 717 | $ | 1,565 | $ | 1,350 | $ | 733 | $ | - | $ | 8,559 | ||||||||||||||||
Charge-offs | (37 | ) | - | - | (18 | ) | (134 | ) | - | - | (189 | ) | ||||||||||||||||||||
Recoveries | 2 | 1 | - | 184 | 167 | - | - | 354 | ||||||||||||||||||||||||
Provisions (credits) | 49 | 185 | (50 | ) | (232 | ) | 50 | (236 | ) | - | (234 | ) | ||||||||||||||||||||
Ending balance, September 30, 2016 | $ | 1,113 | $ | 3,281 | $ | 667 | $ | 1,499 | $ | 1,433 | $ | 497 | $ | - | $ | 8,490 | ||||||||||||||||
Nine months ended September 30, 2017: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2017 | $ | 1,171 | $ | 3,297 | $ | 268 | $ | 1,736 | $ | 1,457 | $ | 490 | $ | - | $ | 8,419 | ||||||||||||||||
Charge-offs | (112 | ) | (114 | ) | - | (475 | ) | (438 | ) | - | - | (1,139 | ) | |||||||||||||||||||
Recoveries | 28 | 43 | 421 | 304 | 300 | - | - | 1,096 | ||||||||||||||||||||||||
Provisions (credits) | 91 | 77 | (412 | ) | 798 | 114 | (182 | ) | - | 486 | ||||||||||||||||||||||
Ending balance, September 30, 2017 | $ | 1,178 | $ | 3,303 | $ | 277 | $ | 2,363 | $ | 1,433 | $ | 308 | $ | - | $ | 8,862 | ||||||||||||||||
Nine months ended September 30, 2016: | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2016 | $ | 1,333 | $ | 3,346 | $ | 853 | $ | 1,205 | $ | 1,494 | $ | 485 | $ | 74 | $ | 8,790 | ||||||||||||||||
Charge-offs | (61 | ) | (251 | ) | - | (1,082 | ) | (652 | ) | - | - | (2,046 | ) | |||||||||||||||||||
Recoveries | 4 | 4 | 9 | 396 | 475 | - | - | 888 | ||||||||||||||||||||||||
Provisions (credits) | (163 | ) | 182 | (195 | ) | 980 | 116 | 12 | (74 | ) | 858 | |||||||||||||||||||||
Ending balance, September 30, 2016 | $ | 1,113 | $ | 3,281 | $ | 667 | $ | 1,499 | $ | 1,433 | $ | 497 | $ | - | $ | 8,490 |
The following table represents the allocation of the ALLL and the related loan balance, by loan category, disaggregated based on the impairment methodology at September 30, 2017 and December 31, 2016:2022.
Real Estate | ||||||||||||||||||||||||||||
Construction, | ||||||||||||||||||||||||||||
Land | State and | |||||||||||||||||||||||||||
Residential | Commercial | Acquisition and | Commercial | Political | ||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Total | |||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 7 | $ | 163 | $ | - | $ | 600 | $ | 2 | $ | - | $ | 772 | ||||||||||||||
Collectively evaluated for impairment | 1,171 | 3,140 | 277 | 1,763 | 1,431 | 308 | 8,090 | |||||||||||||||||||||
Total | $ | 1,178 | $ | 3,303 | $ | 277 | $ | 2,363 | $ | 1,433 | $ | 308 | $ | 8,862 | ||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,789 | $ | 8,256 | $ | 86 | $ | 795 | $ | 397 | $ | - | $ | 11,323 | ||||||||||||||
Collectively evaluated for impairment | 150,468 | 245,535 | 26,719 | 145,253 | 138,337 | 39,271 | 745,583 | |||||||||||||||||||||
Total | $ | 152,257 | $ | 253,791 | $ | 26,805 | $ | 146,048 | $ | 138,734 | $ | 39,271 | $ | 756,906 | ||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 29 | $ | 254 | $ | - | $ | 18 | $ | 1 | $ | - | $ | 302 | ||||||||||||||
Collectively evaluated for impairment | 1,142 | 3,043 | 268 | 1,718 | 1,456 | 490 | 8,117 | |||||||||||||||||||||
Total | $ | 1,171 | $ | 3,297 | $ | 268 | $ | 1,736 | $ | 1,457 | $ | 490 | $ | 8,419 | ||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,929 | $ | 2,937 | $ | 350 | $ | 91 | $ | 297 | $ | - | $ | 5,604 | ||||||||||||||
Collectively evaluated for impairment | 142,331 | 240,893 | 18,007 | 150,667 | 127,547 | 43,709 | 723,154 | |||||||||||||||||||||
Total | $ | 144,260 | $ | 243,830 | $ | 18,357 | $ | 150,758 | $ | 127,844 | $ | 43,709 | $ | 728,758 |
Credit Quality Indicators –Risk Profiles– Commercial Loans
Management continuously monitors and evaluates the credit quality of FNCB’s commercial loans by regularly reviewing certain credit quality indicators.risk profiles. Management utilizes credit risk ratings as the key credit quality indicator for evaluating the credit quality of FNCB’s commercial loan receivables.
FNCB’sFNCB’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 IndicatorsRisk Profile – Other Loans” below. FNCB risk rates certain residential real estate loans and consumer loans that are part of a larger commercial relationship using a credit grading system thatas described in “Credit Risk Profiles – 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
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 noare contractually current or potential problemsas to principal and interest, are otherwise in compliance with the contractual terms of their respective loan agreement and are considered fully collectible. All such loans are evaluated collectively for ALLL calculation purposes. However, accruing loans restructured underManagement believes there is a troubled debt restructuring (“TDRs”) that have been performing for an extended period, do not represent a higherlow risk of loss and have been upgradedrelated to a pass rating are evaluated individually for impairment.pass-rated loans.
Special Mention – Assets classified as special mention do not currently expose FNCB to a sufficient degree of risk to warrant an adverse classification but do possess credit deficiencies or potential weaknesses deserving close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk which, if not corrected, could weaken the asset and increase risk in the future.
Substandard – Assets classified as substandard have well defined weaknesses based on objective evidence and are characterized by the distinct possibility that FNCB will sustain some loss if the deficiencies are not corrected.
Doubtful – Assets classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable and improbable based on current circumstances.
Loss – Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.
Credit Quality Indicators Risk Profiles – Other Loans
Certain residential real estate loans, consumer loans, commercial and commercialmunicipal 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 accruingperforming (accruing) versus non-accrualnon-performing (non-accrual) status as the credit quality indicator for these loan pools.
Collateral Dependent Loans
Loans that do not share risk characteristics are evaluated on an individual basis. Such loans include loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the financial asset is expected to be provided substantially through the operation or sale of collateral. The ACL for collateral dependent loans is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.
The following tables present presents the credit risk profile of loans and leases summarized by portfolio segment and year of origination at September 30, 2023:
Credit Risk Profiles | ||||||||||||||||||||||||||||||||
Term Loans By Origination Fiscal Year | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Loans | ||||||||||||||||||||||||
September 30, 2023 | ||||||||||||||||||||||||||||||||
Credit Risk Profiles - Commercial Loans and Leases | ||||||||||||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | $ | 17,937 | $ | 91,321 | $ | 72,296 | $ | 36,623 | $ | 66,822 | $ | 77,014 | $ | 7,129 | $ | 369,142 | ||||||||||||||||
Special mention | - | - | 2,271 | - | - | 4,775 | 295 | 7,341 | ||||||||||||||||||||||||
Substandard | - | - | 497 | - | - | 2,683 | - | 3,180 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial real state | 17,937 | 91,321 | 75,064 | 36,623 | 66,822 | 84,472 | 7,424 | 379,663 | ||||||||||||||||||||||||
Construction, land acquisition and development | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | 6,236 | 32,987 | 28,646 | 2,842 | 330 | 929 | 1,110 | 73,080 | ||||||||||||||||||||||||
Special mention | - | - | 185 | - | - | - | - | 185 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total construction, land acquisition and development | 6,236 | 32,987 | 28,831 | 2,842 | 330 | 929 | 1,110 | 73,265 | ||||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | 111,839 | 91,200 | 28,527 | 10,460 | 11,384 | 10,638 | 68,350 | 332,398 | ||||||||||||||||||||||||
Special mention | - | 281 | 362 | 669 | 34 | 136 | 7,120 | 8,602 | ||||||||||||||||||||||||
Substandard | - | 3,000 | - | 1,196 | - | 214 | 3,339 | 7,749 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial and industrial | 111,839 | 94,481 | 28,889 | 12,325 | 11,418 | 10,988 | 78,809 | 348,749 | ||||||||||||||||||||||||
State and political subdivisions | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | 12,257 | 12,080 | 21,768 | 2,428 | 15,981 | 4,377 | 2,338 | 71,229 | ||||||||||||||||||||||||
Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total state and political subdivisions | 12,257 | 12,080 | 21,768 | 2,428 | 15,981 | 4,377 | 2,338 | 71,229 | ||||||||||||||||||||||||
Credit Risk Profiles - Other Loans | ||||||||||||||||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||||||||||
Performing | 8,080 | 40,896 | 78,428 | 38,040 | 12,212 | 44,207 | 21,566 | 243,429 | ||||||||||||||||||||||||
Non-performing | - | 130 | 144 | - | 236 | 711 | 112 | 1,333 | ||||||||||||||||||||||||
Total residential real estate | 8,080 | 41,026 | 78,572 | 38,040 | 12,448 | 44,918 | 21,678 | 244,762 | ||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Performing | 22,540 | 32,803 | 20,904 | 3,503 | 2,085 | 5,790 | 36 | 87,661 | ||||||||||||||||||||||||
Non-performing | - | 129 | 135 | 16 | 67 | 76 | - | 423 | ||||||||||||||||||||||||
Total consumer | 22,540 | 32,932 | 21,039 | 3,519 | 2,152 | 5,866 | 36 | 88,084 | ||||||||||||||||||||||||
Total loans and leases | $ | 178,889 | $ | 304,827 | $ | 254,163 | $ | 95,777 | $ | 109,151 | $ | 151,550 | $ | 111,395 | $ | 1,205,752 | ||||||||||||||||
Gross charge-offs | $ | 316 | $ | 951 | $ | 656 | $ | 15 | $ | 20 | $ | 61 | $ | 128 | $ | 2,147 |
The following table presents the recorded investment in loans and leases receivable by loanmajor category and credit quality indicatorindicators at December 31, 2022, prior to the adoption of ASU 2016-13:
Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Commercial Loans and Leases | Other Loans | |||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | |||||||||||||||||||||||||||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | ||||||||||||||||||||||||||||||
Residential real estate | $ | 43,188 | $ | 434 | $ | 99 | $ | - | $ | - | $ | 43,721 | $ | 205,887 | $ | 613 | $ | 206,500 | $ | 250,221 | ||||||||||||||||||||
Commercial real estate | 367,866 | 7,082 | 2,028 | - | - | 376,976 | - | - | - | 376,976 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | 62,965 | 797 | - | - | - | 63,762 | 2,793 | - | 2,793 | 66,555 | ||||||||||||||||||||||||||||||
Commercial and industrial | 260,358 | 829 | 8,875 | - | - | 270,062 | 1,962 | - | 1,962 | 272,024 | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | 92,251 | 361 | 92,612 | 92,612 | ||||||||||||||||||||||||||||||
State and political subdivisions | 64,955 | - | - | - | - | 64,955 | - | - | - | 64,955 | ||||||||||||||||||||||||||||||
Total | $ | 799,332 | $ | 9,142 | $ | 11,002 | $ | - | $ | - | $ | 819,476 | $ | 302,893 | $ | 974 | $ | 303,867 | $ | 1,123,343 |
The following table summarizes activity in the ACL by major category for the three and nine months ended September 30, 20172023 and December 31, 2016:2022.
Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
Commercial Loans | Other Loans | |||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | |||||||||||||||||||||||||||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | ||||||||||||||||||||||||||||||
Residential real estate | $ | 22,866 | $ | 331 | $ | 317 | $ | - | $ | - | $ | 23,514 | $ | 128,287 | $ | 456 | $ | 128,743 | $ | 152,257 | ||||||||||||||||||||
Commercial real estate | 237,484 | 7,695 | 8,612 | - | - | 253,791 | - | - | - | 253,791 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | 23,716 | 333 | 6 | - | - | 24,055 | 2,750 | - | 2,750 | 26,805 | ||||||||||||||||||||||||||||||
Commercial and industrial | 140,427 | 882 | 1,176 | - | - | 142,485 | 3,563 | - | 3,563 | 146,048 | ||||||||||||||||||||||||||||||
Consumer | 2,373 | 94 | 35 | - | - | 2,502 | 136,002 | 230 | 136,232 | 138,734 | ||||||||||||||||||||||||||||||
State and political subdivisions | 38,864 | - | 407 | - | - | 39,271 | - | - | - | 39,271 | ||||||||||||||||||||||||||||||
Total | $ | 465,730 | $ | 9,335 | $ | 10,553 | $ | - | $ | - | $ | 485,618 | $ | 270,602 | $ | 686 | $ | 271,288 | $ | 756,906 |
Construction, | ||||||||||||||||||||||||||||||||
Land | State and | |||||||||||||||||||||||||||||||
Residential | Commercial | Acquisition and | Commercial | Political | ||||||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
Three months ended September 30, 2023 | ||||||||||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Beginning balance, July 1, 2023 | $ | 1,121 | $ | 2,610 | $ | 1,845 | $ | 5,249 | $ | 1,642 | $ | 406 | $ | - | $ | 12,873 | ||||||||||||||||
Charge-offs | - | - | - | (344 | ) | (474 | ) | - | - | (818 | ) | |||||||||||||||||||||
Recoveries | - | 67 | - | 7 | 290 | - | - | 364 | ||||||||||||||||||||||||
Provisions (credits) | 96 | 26 | (504 | ) | 252 | (127 | ) | (13 | ) | - | (270 | ) | ||||||||||||||||||||
Ending balance, September 30, 2023 | $ | 1,217 | $ | 2,703 | $ | 1,341 | $ | 5,164 | $ | 1,331 | $ | 393 | $ | - | $ | 12,149 | ||||||||||||||||
Three months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Beginning balance, July 1, 2022 | $ | 2,208 | $ | 1,082 | $ | 746 | $ | 3,304 | $ | 1,307 | $ | 605 | $ | 1,129 | $ | 13,381 | ||||||||||||||||
Charge-offs | - | - | - | (17 | ) | (394 | ) | - | - | (411 | ) | |||||||||||||||||||||
Recoveries | 3 | 18 | 11 | 12 | 292 | - | - | 336 | ||||||||||||||||||||||||
Provisions (credits) | 8 | 90 | (88 | ) | 454 | 90 | (41 | ) | - | 513 | ||||||||||||||||||||||
Ending balance, September 30, 2022 | $ | 2,219 | $ | 4,190 | $ | 669 | $ | 3,753 | $ | 1,295 | $ | 564 | $ | 1,129 | $ | 13,819 | ||||||||||||||||
Nine months ended September 30, 2023 | ||||||||||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2023 | $ | 2,215 | $ | 4,193 | $ | 747 | $ | 4,099 | $ | 1,307 | $ | 503 | $ | 1,129 | $ | 14,193 | ||||||||||||||||
Impact of ASU-2016-13 | (1,028 | ) | (1,614 | ) | 1,067 | (212 | ) | 370 | (90 | ) | (1,129 | ) | (2,636 | ) | ||||||||||||||||||
Charge-offs | (5 | ) | - | - | (436 | ) | (1,706 | ) | - | - | (2,147 | ) | ||||||||||||||||||||
Recoveries | - | 172 | - | 30 | 1,033 | - | - | 1,235 | ||||||||||||||||||||||||
Provisions (credits) | 35 | (48 | ) | (473 | ) | 1,683 | 327 | (20 | ) | - | 1,504 | |||||||||||||||||||||
Balance at end of period | $ | 1,217 | $ | 2,703 | $ | 1,341 | $ | 5,164 | $ | 1,331 | $ | 393 | $ | - | $ | 12,149 | ||||||||||||||||
Nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2022 | $ | 2,081 | $ | 4,530 | $ | 392 | $ | 2,670 | $ | 1,159 | $ | 455 | $ | 1,129 | $ | 12,416 | ||||||||||||||||
Charge-offs | (3 | ) | - | - | (49 | ) | (757 | ) | - | - | (809 | ) | ||||||||||||||||||||
Recoveries | 3 | 242 | 11 | 23 | 599 | - | - | 878 | ||||||||||||||||||||||||
Provisions (credits) | 138 | (582 | ) | 266 | 1,109 | 294 | 109 | - | 1,334 | |||||||||||||||||||||||
Balance at end of period | $ | 2,219 | $ | 4,190 | $ | 669 | $ | 3,753 | $ | 1,295 | $ | 564 | $ | 1,129 | $ | 13,819 |
The following table presents ending loan and lease balances and related ACL by portfolio segment and impairment methodology at September 30, 2023:
Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
Commercial Loans | Other Loans | |||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | |||||||||||||||||||||||||||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | ||||||||||||||||||||||||||||||
Residential real estate | $ | 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 | 14,101 | 346 | 448 | - | - | 14,895 | 3,462 | - | 3,462 | 18,357 | ||||||||||||||||||||||||||||||
Commercial and industrial | 142,794 | 2,794 | 1,128 | - | - | 146,716 | 4,042 | - | 4,042 | 150,758 | ||||||||||||||||||||||||||||||
Consumer | 2,699 | - | 37 | - | - | 2,736 | 124,935 | 173 | 125,108 | 127,844 | ||||||||||||||||||||||||||||||
State and political subdivisions | 40,424 | 2,964 | 321 | - | - | 43,709 | - | - | - | 43,709 | ||||||||||||||||||||||||||||||
Total | $ | 459,047 | $ | 11,409 | $ | 7,796 | $ | - | $ | - | $ | 478,252 | $ | 249,725 | $ | 781 | $ | 250,506 | $ | 728,758 |
Residential | Commercial | Construction, Land Acquisition and | Commercial | State and Political | ||||||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
September 30, 2023 | ||||||||||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 68 | $ | 113 | $ | - | $ | 14 | $ | - | $ | - | $ | - | $ | 195 | ||||||||||||||||
Collectively evaluated for impairment | 1,149 | 2,590 | 1,341 | 5,150 | 1,331 | 393 | - | 11,954 | ||||||||||||||||||||||||
Total | $ | 1,217 | $ | 2,703 | $ | 1,341 | $ | 5,164 | $ | 1,331 | $ | 393 | $ | - | $ | 12,149 | ||||||||||||||||
Loans and leases receivable: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,076 | $ | 2,696 | $ | - | $ | 414 | $ | 468 | $ | - | $ | - | $ | 4,654 | ||||||||||||||||
Collectively evaluated for impairment | 243,686 | 376,967 | 73,265 | 348,335 | 87,616 | 71,229 | - | 1,201,098 | ||||||||||||||||||||||||
Total | $ | 244,762 | $ | 379,663 | $ | 73,265 | $ | 348,749 | $ | 88,084 | $ | 71,229 | $ | - | $ | 1,205,752 |
The table presents ending loan balances and related ALLL by segment and impairment methodology at December 31, 2022, prior to the adoption of ASU 2016-13:
Residential | Commercial | Construction, Land Acquisition and | Commercial | State and Political | ||||||||||||||||||||||||||||
(in thousands) | Real Estate | Real Estate | Development | and Industrial | Consumer | Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||
Allowance for loan and lease losses: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 17 | $ | 15 | $ | - | $ | 2 | $ | - | $ | - | $ | - | $ | 34 | ||||||||||||||||
Collectively evaluated for impairment | 2,198 | 4,178 | 747 | 4,097 | 1,307 | 503 | 1,129 | 14,159 | ||||||||||||||||||||||||
Total | $ | 2,215 | $ | 4,193 | $ | 747 | $ | 4,099 | $ | 1,307 | $ | 503 | $ | 1,129 | $ | 14,193 | ||||||||||||||||
Loans and leases receivable: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,472 | $ | 5,766 | $ | - | $ | 362 | $ | - | $ | - | $ | - | $ | 7,600 | ||||||||||||||||
Collectively evaluated for impairment | 248,749 | 371,210 | 66,555 | 271,662 | 92,612 | 64,955 | - | 1,115,743 | ||||||||||||||||||||||||
Total | $ | 250,221 | $ | 376,976 | $ | 66,555 | $ | 272,024 | $ | 92,612 | $ | 64,955 | $ | - | $ | 1,123,343 |
The following table presents the amortized cost of collateral-dependent loans and leases by portfolio segment and type of collateral as of September 30, 2023:
September 30, 2023 | ||||||||||||||||
Type of Collateral | ||||||||||||||||
(in thousands) | Residential Property | Commercial Property | Business Assets | Total | ||||||||||||
Loans and leases: | ||||||||||||||||
Residential real estate | $ | 1,076 | $ | - | $ | - | $ | 1,076 | ||||||||
Commercial real estate | - | 2,696 | - | 2,696 | ||||||||||||
Construction, land acquisition and development | - | - | - | - | ||||||||||||
Commercial and industrial | - | 300 | - | 300 | ||||||||||||
Consumer | - | - | - | - | ||||||||||||
State and political subdivisions | - | - | - | - | ||||||||||||
Total collateral dependent loans and leases | $ | 1,076 | $ | 2,996 | $ | - | $ | 4,072 |
A reserve for unfunded commitments is recognized and included in other liabilities on the consolidated statements of financial condition. Periodic adjustments to either increase or decrease the reserve are recognized in non-interest expense in the consolidated statements of income. The balance for unfunded commitments was $1.5 million at September 30, 2023 and $2.2 million at December 31, 2022. Upon the adoption of ASU 2016-13 on January 1, 2023, FNCB recorded an additional reserve for unfunded commitments of $1.3 million. For the three and nine months ended September 30, 2023, FNCB recorded credits for the reserve for unfunded commitments, which resulted in a corresponding decrease to the reserve for unfunded commitments of $234 thousand and $729 thousand, respectively. For the three and nine months ended September 30, 2022, FNCB recorded provisions for unfunded commitments of $338 thousand and $461 thousand, respectively.
The following table presents the delinquency status of past due and non-accrual loans and leases at September 30, 2023 and December 31, 2022:
September 30, 2023 | ||||||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||||||
30-89 Days | >/= 90 Days | Nonaccrual | Total | |||||||||||||||||||||
(in thousands) | Past Due | Past Due | Loans | Past Due | Current | Total | ||||||||||||||||||
Loans and leases: | ||||||||||||||||||||||||
Residential real estate | $ | 379 | $ | - | $ | 1,333 | $ | 1,712 | $ | 243,050 | $ | 244,762 | ||||||||||||
Commercial real estate | 573 | - | 2,867 | 3,440 | 376,223 | 379,663 | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | 73,265 | 73,265 | ||||||||||||||||||
Commercial and industrial | 1,234 | - | 461 | 1,695 | 347,054 | 348,749 | ||||||||||||||||||
Consumer | 1,328 | 59 | 423 | 1,810 | 86,274 | 88,084 | ||||||||||||||||||
State and political subdivisions | - | - | - | - | 71,229 | 71,229 | ||||||||||||||||||
Total loans and leases | $ | 3,514 | $ | 59 | $ | 5,084 | $ | 8,657 | $ | 1,197,095 | $ | 1,205,752 |
December 31, 2022 | ||||||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||||||
30-89 Days | >/= 90 Days | Nonaccrual | Total | |||||||||||||||||||||
(in thousands) | Past Due | Past Due | loans | Past Due | Current | Total | ||||||||||||||||||
Loans and leases: | ||||||||||||||||||||||||
Residential real estate | $ | 555 | $ | - | $ | 713 | $ | 1,268 | $ | 248,953 | $ | 250,221 | ||||||||||||
Commercial real estate | - | - | 1,545 | 1,545 | 375,431 | 376,976 | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | 66,555 | 66,555 | ||||||||||||||||||
Commercial and industrial | 113 | - | 144 | 257 | 271,767 | 272,024 | ||||||||||||||||||
Consumer | 1,378 | 79 | 361 | 1,818 | 90,794 | 92,612 | ||||||||||||||||||
State and political subdivisions | - | - | - | - | 64,955 | 64,955 | ||||||||||||||||||
Total loans and leases | $ | 2,046 | $ | 79 | $ | 2,763 | $ | 4,888 | $ | 1,118,455 | $ | 1,123,343 |
Included in loans and leases 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 $2.6 million and $2.2$5.1 million at September 30, 20172023, and $2.8 million at December 31, 2016, respectively.2022. Generally, loans are placed on non-accrual status when they become 90 days or more delinquent, and remaindelinquent. Once a loan is placed on non-accrual status, it remains on non-accrual status until they areit has been brought current, have sixhas nine months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent, and still be on a non-accrual status. There were no loansLoans past due 90 days or more and still accruing were $59 thousand at September 30, 20172023 and $79 thousand at December 31, 2016.2022, and were comprised entirely of unsecured personal loans purchased from and serviced by a third-party originator.
The following tables present the delinquency status
September 30, 2017 | ||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||
0-29 Days | 30-59 Days | 60-89 Days | >/= 90 Days | |||||||||||||||||
(in thousands) | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||
Performing (accruing) loans: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential real estate | $ | 151,136 | $ | 271 | $ | 328 | $ | - | $ | 151,735 | ||||||||||
Commercial real estate | 251,467 | 519 | 704 | - | 252,690 | |||||||||||||||
Construction, land acquisition and development | 26,777 | 28 | - | - | 26,805 | |||||||||||||||
Total real estate | 429,380 | 818 | 1,032 | - | 431,230 | |||||||||||||||
Commercial and industrial | 144,896 | 272 | 91 | - | 145,259 | |||||||||||||||
Consumer | 137,235 | 992 | 277 | - | 138,504 | |||||||||||||||
State and political subdivisions | 39,262 | 9 | - | - | 39,271 | |||||||||||||||
Total performing (accruing) loans | 750,773 | 2,091 | 1,400 | - | 754,264 | |||||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential real estate | 230 | - | 191 | 101 | 522 | |||||||||||||||
Commercial real estate | - | - | - | 1,101 | 1,101 | |||||||||||||||
Construction, land aquisition and development | - | - | - | - | - | |||||||||||||||
Total real estate | 230 | - | 191 | 1,202 | 1,623 | |||||||||||||||
Commercial and industrial | 750 | - | - | 39 | 789 | |||||||||||||||
Consumer | 76 | 18 | 6 | 130 | 230 | |||||||||||||||
State and political subdivisions | - | - | - | - | - | |||||||||||||||
Total non-accrual loans | 1,056 | 18 | 197 | 1,371 | 2,642 | |||||||||||||||
Total loans receivable | $ | 751,829 | $ | 2,109 | $ | 1,597 | $ | 1,371 | $ | 756,906 |
December 31, 2016 | ||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||
0-29 Days | 30-59 Days | 60-89 Days | >/= 90 Days | |||||||||||||||||
(in thousands) | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||
Performing (accruing) loans: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential real estate | $ | 143,142 | $ | 229 | $ | 107 | $ | - | $ | 143,478 | ||||||||||
Commercial real estate | 241,477 | 830 | 553 | - | 242,860 | |||||||||||||||
Construction, land acquisition and development | 17,766 | 346 | - | - | 18,112 | |||||||||||||||
Total real estate | 402,385 | 1,405 | 660 | - | 404,450 | |||||||||||||||
Commercial and industrial | 150,378 | 307 | 9 | - | 150,694 | |||||||||||||||
Consumer | 126,341 | 1,030 | 300 | - | 127,671 | |||||||||||||||
State and political subdivisions | 43,709 | - | - | - | 43,709 | |||||||||||||||
Total peforming (accruing) loans | 722,813 | 2,742 | 969 | - | 726,524 | |||||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Residential real estate | 176 | 202 | 17 | 387 | 782 | |||||||||||||||
Commercial real estate | 201 | 23 | - | 746 | 970 | |||||||||||||||
Construction, land acquisition and development | - | 245 | - | - | 245 | |||||||||||||||
Total real estate | 377 | 470 | 17 | 1,133 | 1,997 | |||||||||||||||
Commercial and industrial | - | - | - | 64 | 64 | |||||||||||||||
Consumer | 56 | 25 | 2 | 90 | 173 | |||||||||||||||
State and political subdivisions | - | - | - | - | - | |||||||||||||||
Total non-accrual loans | 433 | 495 | 19 | 1,287 | 2,234 | |||||||||||||||
Total loans receivable | $ | 723,246 | $ | 3,237 | $ | 988 | $ | 1,287 | $ | 728,758 |
The following tables present a distribution of the recorded investment and unpaid principal balance of impaired loans and the related allowance for FNCB’s impaired loans, which have been analyzed for impairment under ASC 310, at September 30, 2017 and December 31, 2016.2022, prior to the adoption of ASU 2016-13. 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.table. However, these loans arewere evaluated collectively for impairment as homogenoushomogeneous pools in the general allowance under ASC Topic 450.allowance. Total non-accrual loans other than TDRs, with balances less than the $100$100 thousand loan relationship threshold that were evaluated under ASC Topic 450 amounted to $0.6$0.7 million at September 30, 2017 and $0.8 million at December 31, 2016.2022.
September 30, 2017 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
(in thousands) | Investment | Balance | Allowance | |||||||||
With no allowance recorded: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | $ | 220 | $ | 281 | $ | - | ||||||
Commercial real estate | 5,233 | 5,302 | - | |||||||||
Construction, land acquisition and development | 86 | 86 | - | |||||||||
Total real estate | 5,539 | 5,669 | - | |||||||||
Commercial and industrial | 21 | 53 | - | |||||||||
Consumer | 30 | 30 | - | |||||||||
�� | ||||||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with no related allowance recorded | 5,590 | 5,752 | - | |||||||||
With a related allowance recorded: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | 1,569 | 1,569 | 7 | |||||||||
Commercial real estate | 3,023 | 3,023 | 163 | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Total real estate | 4,592 | 4,592 | 170 | |||||||||
Commercial and industrial | 774 | 774 | 600 | |||||||||
Consumer | 367 | 367 | 2 | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with a related allowance recorded | 5,733 | 5,733 | 772 | |||||||||
Total impaired loans: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | 1,789 | 1,850 | 7 | |||||||||
Commercial real estate | 8,256 | 8,325 | 163 | |||||||||
Construction, land acquisition and development | 86 | 86 | - | |||||||||
Total real estate | 10,131 | 10,261 | 170 | |||||||||
Commercial and industrial | 795 | 827 | 600 | |||||||||
Consumer | 397 | 397 | 2 | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans | $ | 11,323 | $ | 11,485 | $ | 772 |
December 31, 2016 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
(in thousands) | Investment | Balance | Allowance | |||||||||
With no allowance recorded: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | $ | 386 | $ | 477 | $ | - | ||||||
Commercial real estate | 1,066 | 1,143 | - | |||||||||
Construction, land acquisition and development | 350 | 766 | - | |||||||||
Total real estate | 1,802 | 2,386 | - | |||||||||
Commercial and industrial | 73 | 105 | - | |||||||||
Consumer | - | - | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with no related allowance recorded | 1,875 | 2,491 | - | |||||||||
With a related allowance recorded: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | 1,543 | 1,543 | 29 | |||||||||
Commercial real estate | 1,871 | 1,871 | 254 | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Total real estate | 3,414 | 3,414 | 283 | |||||||||
Commercial and industrial | 18 | 18 | 18 | |||||||||
Consumer | 297 | 297 | 1 | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with a related allowance recorded | 3,729 | 3,729 | 302 | |||||||||
Total impaired loans: | ||||||||||||
Real estate: | ||||||||||||
Residential real estate | 1,929 | 2,020 | 29 | |||||||||
Commercial real estate | 2,937 | 3,014 | 254 | |||||||||
Construction, land acquisition and development | 350 | 766 | - | |||||||||
Total real estate | 5,216 | 5,800 | 283 | |||||||||
Commercial and industrial | 91 | 123 | 18 | |||||||||
Consumer | 297 | 297 | 1 | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans | $ | 5,604 | $ | 6,220 | $ | 302 |
December 31, 2022 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
(in thousands) | Investment | Balance | Allowance | |||||||||
With no allowance recorded: | ||||||||||||
Residential real estate | $ | 431 | $ | 509 | $ | - | ||||||
Commercial real estate | 1,071 | 1,339 | - | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Commercial and industrial | 218 | 218 | - | |||||||||
Consumer | - | - | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with no related allowance recorded | 1,720 | 2,066 | - | |||||||||
With a related allowance recorded: | ||||||||||||
Residential real estate | 1,041 | 1,041 | 17 | |||||||||
Commercial real estate | 4,695 | 4,695 | 15 | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Commercial and industrial | 144 | 362 | 2 | |||||||||
Consumer | - | - | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with a related allowance recorded | 5,880 | 6,098 | 34 | |||||||||
Total impaired loans: | ||||||||||||
Residential real estate | 1,472 | 1,550 | 17 | |||||||||
Commercial real estate | 5,766 | 6,034 | 15 | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Commercial and industrial | 362 | 580 | 2 | |||||||||
Consumer | - | - | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans | $ | 7,600 | $ | 8,164 | $ | 34 |
The following table presents the average balance and interest income by loan categorysegment recognized on impairedimpaired loans for the three and nine months ended September 30, 2017 and 2016:2022, prior to the adoption of ASU 2016-13:
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, 2022 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Average | Interest | Average | Interest | |||||||||||||||||||||||||||||||||||||||||
(in thousands) | Average Balance | Interest Income (1) | Average Balance | Interest Income (1) | Average Balance | Interest Income (1) | Average Balance | Interest Income (1) | Balance | Income (1) | Balance | Income (1) | ||||||||||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | 1,815 | $ | 21 | $ | 1,933 | $ | 21 | $ | 1,828 | $ | 63 | $ | 2,416 | $ | 69 | $ | 1,552 | $ | 16 | $ | 1,677 | $ | 46 | ||||||||||||||||||||||||
Commercial real estate | 8,431 | 82 | 2,835 | 23 | 7,941 | 194 | 3,476 | 69 | 6,391 | 56 | 6,771 | 168 | ||||||||||||||||||||||||||||||||||||
Construction, land acquisition and development | 86 | 1 | 379 | 1 | 87 | 3 | 452 | 5 | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Total real estate | 10,332 | 104 | 5,147 | 45 | 9,856 | 260 | 6,344 | 143 | ||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 1,212 | 1 | 196 | - | 1,136 | 15 | 315 | 2 | 402 | 5 | 518 | 15 | ||||||||||||||||||||||||||||||||||||
Consumer | 328 | 3 | 299 | 1 | 329 | 9 | 301 | 7 | - | - | - | - | ||||||||||||||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Total impaired loans | $ | 11,872 | $ | 108 | $ | 5,642 | $ | 46 | $ | 11,321 | $ | 284 | $ | 6,960 | $ | 152 | $ | 8,345 | $ | 77 | $ | 8,966 | $ | 229 |
(1) Interest represents income recognized on performing TDRs.
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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 $50$42 thousand and $116$128 thousand for the three and nine months ended September 30, 2017, respectively, and $48 thousand and $175 thousand for the three and nine months ended September 30, 2016.2022, respectively.
Troubled Debt Restructured LoansLoan Modifications to Borrowers Experiencing Financial Difficulty
TDRs at September 30, 2017 and December 31, 2016 were $10.2 million and $4.3 million, respectively. Accruing and non-accruing TDRs were $9.3 million and $0.9 million, respectively at September 30, 2017, and $4.2 million and $0.1 million, respectively at December 31, 2016. Approximately $772 thousand and $261 thousand in specific reserves have been establishedASU 2022-02 eliminated the accounting guidance for TDRs as of September 30, 2017while enhancing disclosure requirements for certain loan refinancing and December 31, 2016, respectively.restructurings by creditors when a borrower is experiencing financial difficulty. In accordance with the new guidance, FNCB was not committed to lend additional funds to any loan classified as a TDR at September 30, 2017.
The modification of the terms of suchno longer evaluates loans may include one or a combination of the following, among others: a reduction of the stated interest rate of the loan, an extension of the maturity date, capitalization of real estate taxes, a payment modification under a forbearance agreement, or a permanent reduction of the recorded investment in the loan.
The following tables show the pre- and post-modification recorded investment in loans modified as TDRs during the three and nine months ended September 30, 2017 and 2016.
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
(dollars in thousands) | Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Residential real estate | - | $ | - | $ | - | 1 | $ | 63 | $ | 63 | ||||||||||||||
Commercial real estate | - | - | - | 8 | 5,250 | 5,250 | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | - | - | - | 4 | 1,845 | 1,845 | ||||||||||||||||||
Consumer | 2 | 85 | 104 | 2 | 85 | 104 | ||||||||||||||||||
States and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total new troubled debt restructurings | 2 | $ | 85 | $ | 104 | 15 | $ | 7,243 | $ | 7,262 |
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
Pre-Modification | Post-Modification | Pre-Modification | Post-Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
(dollars in thousands) | Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||||||||
Troubled debt restructurings: | ||||||||||||||||||||||||
Residential real estate | 1 | $ | 95 | $ | 99 | 1 | $ | 95 | $ | 99 | ||||||||||||||
Commercial real estate | - | - | - | - | - | - | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | - | - | - | - | - | - | ||||||||||||||||||
Consumer | - | - | - | - | - | - | ||||||||||||||||||
States and political subdivisions | - | - | - | - | - | - | ||||||||||||||||||
Total new troubled debt restructurings | 1 | $ | 95 | $ | 99 | 1 | $ | 95 | $ | 99 |
The following table presents the types of with modifications made during the threeto borrowers experiencing financial difficulty individually for impairment, nor establishes a related specific reserve for such loans, but rather these loans are included in their respective portfolio segment and nine months ended September 30, 2017 and 2016:evaluated collectively for impairment to establish an ACL.
Three months ended September 30, 2017 | Nine months ended September 30, 2017 | |||||||||||||||||||||||||||||||||||||||
(in thousands) | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total Modifications | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total Modifications | ||||||||||||||||||||||||||||||
Types of modification: | ||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 63 | $ | - | $ | - | $ | - | $ | 63 | ||||||||||||||||||||
Commercial real estate | - | - | - | - | - | - | - | - | 5,250 | 5,250 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Commercial and industrial | - | - | - | - | - | - | - | 25 | 1,820 | 1,845 | ||||||||||||||||||||||||||||||
Consumer | - | 85 | - | - | 85 | - | 85 | - | - | 85 | ||||||||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total modifications | $ | - | $ | 85 | $ | - | $ | - | $ | 85 | $ | 63 | $ | 85 | $ | 25 | $ | 7,070 | $ | 7,243 |
Three months ended September 30, 2016 | Nine months ended September 30, 2016 | |||||||||||||||||||||||||||||||||||||||
(in thousands) | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total Modifications | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total Modifications | ||||||||||||||||||||||||||||||
Types of modification: | ||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | - | $ | 95 | $ | - | $ | - | $ | 95 | $ | - | $ | 95 | $ | - | $ | - | $ | 95 | ||||||||||||||||||||
Commercial real estate | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Commercial and industrial | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
State and political subdivisions | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total modifications | $ | - | $ | 95 | $ | - | $ | - | $ | 95 | $ | - | $ | 95 | $ | - | $ | - | $ | 95 |
There were eight loan relationships modified as TDRswas one modification made to a borrower experiencing financial difficulty during the nine months ended September 30, 2017, which incorporated2023. The modification involved a total12-month extension of fifteen individual loans. There were threeterm for a loan relationships, comprised of eight commercial real estate loans totaling $5.3 million, and two loan relationships, comprised of four commercial and industrial loans totaling $1.8 million, that were modified under varying forms of forbearance agreements during the nine months ended September 30, 2017. Additional TDRs included two consumer loans totaling $85 thousand that had their terms extended and delinquent taxes capitalized, as well as onesecured by residential real estate loanwith an amortized cost basis of $79 thousand, which was not significant relative to the total period-end amortized cost basis of all loans in the amount of $63 thousand that had its terms extended. The commercialresidential real estate modifications included a principal forbearance agreement for one loan in the amount of $4.0 million and reductions in required monthly principal payments resulting in balloon payments due at maturity for seven loans to two borrowers aggregating $1.2 million. The four commercial and industrialportfolio segment. There were no loan modifications involved the delay of required principal and interest payments for predefined time periods. In addition, a charge-off in the amount of $0.3 million was recorded as part of the modification of three commercial and industrial loans aggregating $1.8 millionmade to one borrower. During the third quarter of 2017, two of the four commercial and industrial loans totaling $0.8 million were paid off. All remaining loans modifiedborrowers experiencing financial difficulty during the three and nine months ended September 30, 2017 are performing in accordance with their respective modified terms.2022.
The following table presents the number and recorded investment
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number of | Recorded | Number of | Recorded | |||||||||||||
(dollars in thousands) | Contracts | Investment | Contracts | Investment | ||||||||||||
Troubled debt restructurings: | ||||||||||||||||
Residential real estate | - | $ | - | 3 | $ | 145 | ||||||||||
Commercial real estate | - | - | 1 | 680 | ||||||||||||
Construction, land acquisition and development | 1 | 10 | - | - | ||||||||||||
Commercial and industrial | - | - | - | - | ||||||||||||
Consumer | - | - | - | - | ||||||||||||
State and political subdivisions | - | - | - | - | ||||||||||||
Total TDR defaults | 1 | $ | 10 | 4 | $ | 825 |
There were no TDRs that were modified within the previous 12 months which defaulted during the three months ended September 30, 2017 and 2016. For the nine months ended September 30, 2016, one of the three residential real estate TDRs that defaulted suffered a decline in collateral value, which resulted in a charge against the ALLL of $37 thousand. The one commercial real estate loan that defaulted during the nine months ended September 30, 2016 was foreclosed upon and transferred to OREO during the third quarter of 2016.
Residential Real Estate Loan Foreclosures
There were two consumer mortgage loans secured bythree residential real estate properties with an aggregate recorded investment of $14$205 thousand that were in the process of foreclosure at September 30, 2017.2023. There were three residential real estate properties with an aggregate recorded investment of $228 thousand that were in the process of foreclosure at September 30, 2022. There were no residential real estate properties that were foreclosed upon during the three months ended included in other real estate owned ("OREO") at September 30, 2017. For the nine months ended September 30, 2017, there were two residential real estate properties with an aggregate carrying value of $125 thousand that were foreclosed upon. Of the two loans foreclosed upon during the nine months ended September 30, 2017, one was an investor-owned residential real estate property with a current carrying value of $30 thousand. There was one residential real estate property with a carrying value of $237 thousand that was foreclosed upon during the nine months ended September 30, 2016.2023 and 2022.
There were four residential real estate properties with an aggregate carrying value of $149 thousand included in OREO at September 30, 2017, and two residential real estate properties with an aggregate carrying value of $41 thousand included in OREO at December 31, 2016.Note 5. Deposits
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The following table presents deposits by major category at September 30, 20172023 and December 31, 2016:2022:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
(in thousands) | 2017 | 2016 | 2023 | 2022 | ||||||||||||
Demand (non-interest bearing) | $ | 162,426 | $ | 173,702 | $ | 297,740 | $ | 305,850 | ||||||||
Interest-bearing: | ||||||||||||||||
Interest-bearing demand | 520,512 | 551,114 | 734,395 | 808,497 | ||||||||||||
Savings | 101,755 | 103,241 | 133,001 | 148,426 | ||||||||||||
Time ($250,000 and over) | 42,094 | 35,917 | 53,348 | 24,902 | ||||||||||||
Other time | 156,425 | 151,165 | 283,891 | 132,972 | ||||||||||||
Total interest-bearing | 820,786 | 841,437 | 1,204,635 | 1,114,797 | ||||||||||||
Total deposits | $ | 983,212 | $ | 1,015,139 | $ | 1,502,375 | $ | 1,420,647 |
Included in other time deposits were brokered deposits of $123.1 million at September 30, 2023 and $23.9 million at December 31, 2022.
Note 6. Borrowed Funds
FNCB has an agreement with the FHLB of Pittsburgh which allows for borrowings, either overnight or term, up to a maximum borrowing capacity based on a percentage of qualifying loans pledged under a blanket pledge agreement. In addition to pledging loans, FNCB is required to purchase FHLB of Pittsburgh stock based upon the amount of credit extended. Loans that were pledged to collateralize borrowings under this agreement were $503.5 million at September 30, 2023 and $521.3 million at December 31, 2022. FNCB's maximum borrowing capacity was $375.7 million at September 30, 2023. Advances through the FHLB of Pittsburgh were $176.4 million at September 30, 2023 and $172.1 million at December 31, 2022. FNCB utilized letters of credit through the FHLB of Pittsburgh to secure municipal deposits. Deposit letters of credit outstanding were $66.0 million at September 30, 2023 and $47.5 million at December 31, 2022. FNCB had remaining borrowing availability at the FHLB of Pittsburgh of $132.1 million at September 30, 2023.
Advances through the Federal Reserve Bank Discount Window generally include short-term advances which are fully collateralized by certain pledged loans under the Federal Reserve Bank's Borrower-in-Custody ("BIC") program. On March 12, 2023, the Federal Reserve Bank established the Bank Term Funding Program (“BTFP”), a new program through the Discount Window to provide additional funding to eligible depository institutions. The BTFP is collateralized by high-quality securities valued at par including U.S. Treasury securities, U.S. government agency debt and mortgage-backed securities and other qualifying securities. At September 30, 2023, FNCB had loans pledged under the BIC program of $154.3 million and securities pledged under the BTFP of $28.3 million. There were no advances under either the BIC or BTFP program outstanding at September 30, 2023 and no advances under the BIC program at December 31, 2022.
The following table presents borrowings, by type, outstanding, at September 30, 2023 and December 31, 2022.
September 30, | December 31, | |||||||
(in thousands) | 2023 | 2022 | ||||||
FHLB of Pittsburgh advances: | ||||||||
FHLB of Pittsburgh - overnight | $ | 35,000 | $ | 139,400 | ||||
FHLB of Pittsburgh - term | 141,423 | 32,650 | ||||||
Subtotal FHLB of Pittsburgh advances | 176,423 | 172,050 | ||||||
Junior subordinated debentures | 10,310 | 10,310 | ||||||
Total borrowed funds | $ | 186,733 | $ | 182,360 |
Note 7. Derivative and Hedging Transactions
Total deposits decreased $31.9 millionRiskManagementObjectiveofUsingDerivatives
FNCB is exposed to $983.2 million at certain risks arising from both its business operations and economic conditions. It principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. FNCB manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, FNCB enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future unknown and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash payments primarily related to FNCB's borrowings. FNCB's existing credit derivatives result from loan participations arrangements, and therefore, are not used to manage interest rate risk in FNCB's assets or liabilities.
Cash Flow Hedges of Interest Rate Risk
FNCB's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, FNCB primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for FNCB making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with forecasted issuances of debt in 2023 and 2022.
For derivatives that are designated and qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on FNCB's variable-rate debt. During the next twelve months, it is estimated that an additional $765 thousand will be reclassified as a decrease to interest expense.
Fair Value Hedges of Interest Rate Risk
FNCB is exposed to changes in the fair value of pools of fixed-rate assets due to changes in benchmark interest rates. FNCB uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for FNCB receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives that are designated and qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
As of September 30, 2017 from $1.015 billion at 2023 and December 31, 2016. Non-interest-bearing deposits decreased $11.3 million to $162.4 million at September 30, 2017 from $173.7 million at December 31, 2016. Interest-bearing deposits decreased $20.6 million to $820.8 million at September 30, 2017 from $841.4 million at December 31, 2016. The decrease in non-interest-bearing deposits was primarily due to movements2022, the following amounts were recorded in the balancesconsolidated statements of larger commercial deposit relationships. The decrease in interest-bearing deposits was primarily due to the anticipated exit of short-term fundsfinancial condition related to the salecarrying amount of a municipal utility deposited in December 2016,hedged assets and normal cyclical deposit trends of public depositors.cumulative basis adjustment for fair value hedges:
Line Item in the Statement of Financial Condition in Which the Hedged Item is Included Carrying Amount of the Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets 2023 2022 2023 2022 Fixed Rate Loans (1) Total (1) These amounts include the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At September 30, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $92.5 million; the cumulative basis adjustments associated with these hedging relationships was ($0.7) million; and the amounts of the designated hedged items were $25 million. There were no such hedging relationships at September 30, 2022. Non-designated Hedges Derivatives not designated as hedges are not speculative and result from a service FNCB provides to certain customers. FNCB executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that FNCB executes with a third party, such that FNCB minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. FNCB's existing credit derivatives result from participations out of interest rate swaps provided to external lenders as part of loan participation arrangements, and therefore, are not used to manage interest rate risk in FNCB's assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service FNCB provides to certain lenders which participate in loans. 20 Fair Values of Derivative Instruments on the Consolidated Statements of Financial Condition The following table presents the fair value of FNCB's derivative financial instruments and the classification on the consolidated statements of financial condition at September 30, 2023 and December 31, 2022:
(1) Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consists of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. 21 Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Loss ("AOCL") The following table presents the effect of fair value and cash flow hedge accounting on AOCL for the three and nine months ended September 30, 2023 and 2022. Amounts disclosed are gross and not net of taxes:
22 Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income The following table presents the effect of the FNCB's derivative financial instruments on the consolidated statements of income for the three and nine months ended September 30, 2023 and 2022:
23 Effect of Derivatives Not Designated as Hedging Instruments on the Consolidated Statements of Income Derivative financial instruments that are not designated as hedging instruments had no effect on the consolidated statements of income for the nine months ended September 30, 2023 and 2022. Credit-risk-related Contingent Features FNCB has agreements with each of its derivative counterparties that contain a provision where if FNCB defaults or is capable of being declared in default on any of its indebtedness, then it could also be declared in its derivative obligations. FNCB has agreements with certain of its derivatives counterparties that contain a provision where if it fails to maintain its status as a well-capitalized institution, then it could be required to post additional collateral. FNCB has minimum collateral posting thresholds with certain of its derivative counterparties for derivatives in a net liability position. As of September 30, 2023 and December 31, 2022, FNCB had no derivatives in a net liability position and accordingly was not required to post any collateral with its counterparties. Note 8. Income Taxes |
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The following table presents a reconciliation between the effective income tax expense and the incomeincome tax expense that would have been provided at the federal statutory tax rate of 34.0%21.0% for the three and nine months ended September 30, 2017 2023 and 2016:2022.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
(in thousands) | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
Provision at statutory tax rates | $ | 1,054 | 34.00 | % | $ | 932 | 34.00 | % | $ | 2,994 | 34.00 | % | $ | 2,175 | 34.00 | % | ||||||||||||||||
Add (deduct): | ||||||||||||||||||||||||||||||||
Tax effects of non-taxable income | (108 | ) | (3.48 | %) | (121 | ) | (4.42 | %) | (342 | ) | (3.88 | %) | (374 | ) | (5.85 | %) | ||||||||||||||||
Non-deductible interest expense | 3 | 0.11 | % | 2 | 0.07 | % | 9 | 0.10 | % | 7 | 0.11 | % | ||||||||||||||||||||
Bank-owned life insurance | (44 | ) | (1.41 | %) | (47 | ) | (1.70 | %) | (136 | ) | (1.54 | %) | (145 | ) | (2.27 | %) | ||||||||||||||||
Change in valuation allowance | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | (8 | ) | (0.13 | %) | |||||||||||||||||||
Other items, net | (78 | ) | (2.53 | %) | (42 | ) | (1.54 | %) | 18 | 0.20 | % | (44 | ) | (0.68 | %) | |||||||||||||||||
Income tax expense | $ | 827 | 26.69 | % | $ | 724 | 26.41 | % | $ | 2,543 | 28.88 | % | $ | 1,611 | 25.19 | % |
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 $0.7 million of charitable contribution carryovers and $2.6 million in alternative minimum tax (“AMT”) credit carryovers. The charitable contribution carryovers will begin to expire after December 31, 2017 if not utilized, while AMT credit carryovers have an indefinite life.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
(dollars in thousands) | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
Provision at statutory tax rates | $ | 1,023 | 21.00 | % | $ | 1,372 | 21.00 | % | $ | 2,501 | 21.00 | % | $ | 3,946 | 21.00 | % | ||||||||||||||||
Add (deduct) tax effects of: | ||||||||||||||||||||||||||||||||
Tax-free interest income | (209 | ) | (4.29 | )% | (230 | ) | (3.52 | )% | (627 | ) | (5.27 | )% | (644 | ) | (3.43 | )% | ||||||||||||||||
Non-deductible interest expense | 21 | 0.43 | % | 11 | 0.17 | % | 64 | 0.54 | % | 34 | 0.18 | % | ||||||||||||||||||||
Bank-owned life insurance | (45 | ) | (0.92 | )% | (42 | ) | (0.64 | )% | (129 | ) | (1.08 | )% | (114 | ) | (0.61 | )% | ||||||||||||||||
Unrealized losses on equity securities | 41 | 0.84 | % | (18 | ) | (0.28 | )% | 372 | 3.12 | % | 25 | 0.13 | % | |||||||||||||||||||
Other items, net | (122 | ) | (2.50 | )% | 8 | 0.12 | % | 96 | 0.81 | % | 18 | 0.10 | % | |||||||||||||||||||
Income tax provision | $ | 709 | 14.56 | % | $ | 1,101 | 16.85 | % | $ | 2,277 | 19.12 | % | $ | 3,265 | 17.38 | % |
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. 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. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. If management determines based on available evidence, both positive and negative, that it is more likely than not that some portion or all 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.
Management performed an evaluation of FNCB’sFNCB’s deferred tax assets at September 30, 2017 and December 31, 20162023 taking into consideration all available positive and negative evidence at that time. Based on this evaluation, management believes that FNCB’s future taxable income will be sufficient to utilize its deferred tax assets. Accordingly, aThere was no valuation allowance for deferred tax assets was not requiredrecorded at September 30, 20172023 and December 31, 2016.
FNCB uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. On September 27, 2017, the Trump Administration released a tax reform framework that includes a reduction in the U.S. corporate income tax rate to 20.0%2022. If corporate tax rates are 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. The House of Representatives is currently working on a draft of the bill, which is expected to be addressed by Congress later in 2017. It is too early to determine if any of the proposals on tax reform are actionable, or if acted upon, the specific tax reforms that would be implemented. Accordingly, management cannot assess the effect that any tax reform measure effectuated would have on FNCB’s operating results or financial position at the present time.
Note 7.9. Related Party Transactions
In conducting its business, FNCB has engaged in, and intends to continue to engage in, banking and financial transactions with directors, executive officers and their related parties.
FNCB has granted loans, letters of credit and lines of credit to directors, executive officers and their related parties. The following table summarizes the changes in the total amounts of such outstanding loans, advances under lines of credit, net of any participations sold, as well as repayments during the three and nine months ended September 30, 2017 2023 and 2016:2022.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Balance, beginning of period | $ | 41,425 | $ | 43,664 | $ | 42,007 | $ | 52,652 | ||||||||
Additions, new loans and advances | 30,971 | 3,492 | 67,743 | 10,704 | ||||||||||||
Repayments | (6,381 | ) | (2,115 | ) | (43,735 | ) | (18,294 | ) | ||||||||
Other (1) | - | (28 | ) | - | (49 | ) | ||||||||||
Balance, end of period | $ | 66,015 | $ | 45,013 | $ | 66,015 | $ | 45,013 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Balance, beginning of period | $ | 97,471 | $ | 82,744 | $ | 79,144 | $ | 71,437 | ||||||||
Additions, new loans and advances | 63,665 | 28,560 | 177,899 | 57,966 | ||||||||||||
Repayments | (65,331 | ) | (22,901 | ) | (161,238 | ) | (41,000 | ) | ||||||||
Balance, end of period | $ | 95,805 | $ | 88,403 | $ | 95,805 | $ | 88,403 |
At September 30, 2017,2023 and December 31, 2022, there were no loans made to directors, executive officers and their related parties that were not performing in accordance with the original terms of the loan agreements. As of December 31, 2016, there was one loan relationship aggregating $381 thousand to a business partially owned by a director that had been classified as “Special Mention”. Management had classified the loan relationship as Special Mention strictly because FNCB had not received current financial information from a non-related party to the loan agreements. As of September 30, 2017, the required updated financial information had been received, and the loan relationship was no longer criticized.
On September 27, 2017, the Board of Directors of FNCB elected three new directors to the Board of Directors. The addition of the three directors and their related parties contributed $22.8 million of the additions, new loans and advances during the three and nine months ended September 30, 2017.
Deposits from directors, executive officers and their related parties held by the Bank at September 30, 20172023 and December 31, 2016 amounted to $103.82022 were$135.8 million and $119.3$133.0 million, respectively. Interest paid on the deposits amounted to $209$1.5 million and $229 thousand and $143 thousand, respectively, for the nine months ended on September 30, 2017 2023 and 2016.2022, 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 and commercial package insurance, legal services, and repair of repossessed automobiles for resale.rent. FNCB recorded payments to related parties for goods and services of $1.0 million$23thousand and $2.1 million$107 thousand for the three and nine months ended September 30, 2017, respectively,2023 and $1.0 million$57 thousand and $1.9 million$137 thousand for the respective periods of 2016.
Subordinated notes (the “Notes”) held by directors and/or their related parties totaled $3.1 million at September 30, 2017 and $6.2 million at December 31, 2016. During the nine months ended September 30, 2017, FNCB paid the quarterly interest payments due on the Notes for the period of December 1, 2016 through August 31, 2017, totaling $343 thousand, of which $211 thousand was paid to directors and/or their related interests. During the nine months ended September 30, 2016, FNCB paid the quarterly interest payments due on the Notes for the period of December 1, 2015 through August 31, 2016, totaling $481 thousand, of which $296 thousand was paid to directors and/or their related interests. Also during the nine months ended September 30, 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, of which $3.9 million was paid to directors and/or their related interests.
On July 27, 2017, the Board of Directors approved the acceleration of a partial principal repayment in the amount of $5.0 million on Notes, of which $3.1 million was repaid to directors and/or their related parties. This principal repayment, which was originally due and payable on September 1, 2018, was paid to Noteholders on September 1, 2017.2022.
Note 10. Commitments and Contingencies
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On May 24, 2012,Leases
FNCB is obligated under operating leases for certain bank branches, office space, automobiles and equipment. Operating lease right of use ("ROU") assets represent FNCB's right to use an underlying asset during the lease term and operating liabilities represent FNCB's obligation to make lease payments under the lease agreement. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a putative shareholder filed a complaintdiscount rate that represents FNCB's incremental borrowing rate at the commencement date. ROU assets are included in other assets and operating lease liabilities are included in other liabilities in the Courtconsolidated statements of Common Pleas for Lackawanna County (“Shareholder Derivative Suit”) against certain presentfinancial condition. As of September 30, 2023, ROU assets and former directorslease liabilities were $3.0 million and officers of FNCB (the “Individual Defendants”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste,$3.3 million, respectively.
Operating lease expense associated with bank branches and unjust enrichment. FNCB was named as a nominal defendant. 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, without admitting any fault, wrongdoing or liability, the Individual Defendants 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 wasoffice space is included in non-interestoccupancy expense, while operating lease expenses associated with automobiles and office equipment are included in equipment expense in the consolidated statements of incomeincome. Rental expense incurred for the yearthree and nine months ended December 31, 2013. On April 1, 2014, FNCB paidSeptember 30, 2023 was $100 thousand and $301 thousand, respectively, and $123 thousand and $292 thousand for the $2.5 millionthree and nine months ended September 30, 2022, respectively.
The following table summarizes the maturity of remaining operating lease liabilities as of September 30, 2023:
(in thousands) | September 30, 2023 | |||
2023 | $ | 97 | ||
2024 | 417 | |||
2025 | 388 | |||
2026 | 387 | |||
2027 | 388 | |||
2028 and thereafter | 2,271 | |||
Total lease payments | 3,948 | |||
Less: imputed interest | 671 | |||
Present value of operating lease liabilities | $ | 3,277 |
The following table presents other information related to fees and costs of the plaintiff’s attorneys and partial indemnification of the Individual Defendants in the amount of $2.5 million. On July 1, 2017, FNCB continued to make partial indemnification to the Individual Defendants by commencing monthly principal payments, on behalf of the Individual Defendants, of $25,000 plus accrued interest due to First Northern Bank and Trust Co. As of September 30, 2017, $2.5 million plus accrued interest remains accrued in other liabilities related to the potential indemnification of the Individual Defendants.our operating leases:
(dollars in thousands) | September 30, 2023 | September 30, 2022 | ||||||
Weighted-average remaining lease term (in years) | 10.9 | 11.8 | ||||||
Weighted-average discount rate | 3.27 | % | 3.26 | % | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 320 | $ | 309 |
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. Discovery is complete and the parties have exchanged expert reports. Dispositive motions have been submitted by the parties and the Court heard oral arguments on the motions on August 9, 2017. At this time, FNCB cannot reasonably determine the outcome of 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 other similarly situated vs. First National Community Bancorp, Inc. and First National Community Bank, LitigationCivil 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 denies 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 Dollars ($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; and 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 was approved by Court Order on May 31, 2017. On March 2, 2017 FNCB paid the Settlement Administrator $750,000 pursuant to the terms and conditions of the Settlement Agreement. Additionally, in association with the subject vehicle loans, FNCB has completed the removal of trade lines on each class members' credit report and has substantially completed satisfying judgments, where applicable, in favor of class members. 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.
There have been no changes in the status of the other litigation disclosed in FNCB’s Annual Report on Form 10-K for the year ended December 31, 2016.
Note 11. Stock Compensation Plans
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FNCB had an Employee Stock Incentive Plan (the “Stock Incentive Plan”), where 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 have been, or will be, made under the Stock Incentive Plan. No compensation expense related to options under the Stock Incentive Plan was required to be recorded in the three and nine months ended September 30, 2017 and 2016.
During the nine months ended September 30, 2017, 6,500 options outstanding under the Stock Incentive Plan were forfeited at a weighted average price outstanding of $13.15. As of September 30, 2017, 31,200 options remain outstanding and exercisable at a weighted average price of $13.15. There have been no other changes to the status of FNCB’s Stock Incentive Plan as of, or for the nine months ended, September 30, 2017. For additional information related to the Stock Incentive Plan, refer to Note 13 to the consolidated financial statements included in FNCB’s Annual Report on Form 10-K for the year ended December 31, 2016.
FNCB has a Long-Term Incentive Compensation Plan (“LTIP”) for directors, executives and key employees. The LTIP authorizesemployees that authorized 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. During the nine months ended September 30, 2017 2023 and 2016,2022, the Board of Directors granted 54,549140,445 and 67,60071,860 shares of restricted stock, respectively, under the LTIP. At September 30, 2017, there were 977,619 sharesUpon adoption of common stock available for awardthe Equity Plan (as defined below), FNCB will make no further awards under the LTIP. For the nine months ended September 30, 2017 2023 and 2016,2022, stock-based compensation expense, which is included in salaries and employee benefits expense in the consolidated statements of income, totaled $234$416 thousand and $195$334 thousand, respectively. Total unrecognized compensation expense related to unvested restricted stock awards was $539 thousand$1.8 million and $468 thousand$1.3 million at September 30, 2017 2023 and 2016,2022, respectively. Unrecognized compensation expense related to unvested shares of restricted stock is expected to be recognized over a weighted-average period of 3.9 years.
On March 22, 2023, the Board of Directors formally approved and adopted the FNCB Bancorp, Inc. 2023 Equity Incentive Plan ("Equity Plan"), which replaced the LTIP. The Equity Plan authorizes 2,000,000 shares of FNCB's common stock plus 455,584 of remaining reserved but unissued shares under the LTIP and provides the Compensation Committee or the Board of Directors with the authority to offer several types of awards including stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units. The Equity Plan was approved by a majority vote by FNCB shareholders at the Annual Meeting of Shareholders on May 17, 2023.
On July 3, 2023, 2,454 shares of FNCB's common stock were granted under the Equity Plan to each of the Bank's ten non-employee directors or 24,540 shares in aggregate. The shares of stock vested immediately to each director upon grant, and the fair value per share on the grant date was $6.11. Directors' fees totaling $150 thousand associated with this grant were recognized on July 3, 2023.
In addition, on July 3, 2023, 100 shares of FNCB's common stock were granted under the Equity Plan to each of the Bank's twenty-two advisory board members or 2,200 shares in aggregate. The shares of stock vested immediately to each member upon grant, and the fair value per share on the grant date was $6.11. FNCB recognized advisory board fees of $13 thousand associated with this grant on July 3, 2023.
At September 30, 2023, there were 2,435,076 shares of FNCB common stock available for award under the Equity Plan.
The following table summarizes the activity related to FNCB’sFNCB’s unvested restricted stock awards during the three and nine months ended September 30, 2017 2023 and 2016:2022:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | |||||||||||||||||||||||||
Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | |||||||||||||||||||||||||
Unvested, beginning of period | 106,495 | $ | 6.24 | 109,596 | $ | 5.75 | 103,874 | $ | 5.74 | 112,958 | $ | 5.99 | ||||||||||||||||||||
Awards granted | - | - | - | - | 54,549 | 6.83 | 67,600 | 5.53 | ||||||||||||||||||||||||
Forfeitures | (366 | ) | 6.83 | (5,097 | ) | 5.94 | (5,416 | ) | 5.73 | (23,211 | ) | 5.69 | ||||||||||||||||||||
Vestings | - | - | - | - | (46,878 | ) | 5.90 | (52,848 | ) | 6.02 | ||||||||||||||||||||||
Unvested, end of period | 106,129 | $ | 6.23 | 104,499 | $ | 5.74 | 106,129 | $ | 6.23 | 104,499 | $ | 5.74 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | Restricted | Grant Date | |||||||||||||||||||||||||
(dollars in thousands) | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||||||||
Unvested restricted stock awards: | ||||||||||||||||||||||||||||||||
Total outstanding, beginning of period | 267,985 | $ | 7.89 | 188,359 | $ | 8.22 | 185,965 | $ | 8.22 | 174,297 | $ | 7.37 | ||||||||||||||||||||
Awards granted | - | - | - | - | 140,445 | 7.51 | 71,860 | 9.64 | ||||||||||||||||||||||||
Forfeitures | (6,232 | ) | 7.87 | (2,394 | ) | 8.33 | (6,232 | ) | 7.87 | (5,503 | ) | 8.17 | ||||||||||||||||||||
Shares vested | - | - | - | - | (58,425 | ) | 8.01 | (54,689 | ) | 7.38 | ||||||||||||||||||||||
Total outstanding, end of period | 261,753 | $ | 7.89 | 185,965 | $ | 8.21 | 261,753 | $ | 7.89 | 185,965 | $ | 8.21 |
Note 1012.Regulatory Matters/Subsequent Event
FNCB’sFNCB’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to FNCB. Bank regulationsRegulations with respect to the banking industry limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. For the three and nine months ended September 30, 2017, cashCash dividends declared and paid by FNCB for the three and nine months ended September 30, 2023were $0.03$0.090 per share and $0.09$0.270 per share, respectively, and $0.02$0.090 per share and $0.06$0.240 per share, respectively, for the same periods of 2016. On April 27, 2016, the Board of Directors approved the reinstatement of thethree and nine months ended September 30, 2022. FNCB offers a Dividend Reinvestment and Stock Purchase Plan (“DRP”) which became effective on June 1, 2016. Effective July 1, 2017,to its shareholders. For the three and nine months ended September 30, 2023 and 2022, dividend reinvestment shares acquired under the DRP were purchased in open market transactions. Previously, FNCB issuedtransactions, however, shares under the optional cash purchase feature of the DRP were issued from authorized but unissued common shares. Accordingly, there were no common shares issued under the DRP during the three months ended September 30, 2017. Common shares issued under the DRP for the three and nine months ended September 30, 20172023 totaled 65,240. Common shares issued under the DRP1,439 and 8,814, respectively, and 1,550 and 3,919, respectively for the comparablesame periods of 2016 were 27,988 and 47,763 shares, respectively. Additionally,2022. Subsequent to September 30, 2023, on October 25, 2017, 2023 FNCB declared a cash dividend for the fourth quarter of 20172023 of $0.04$0.090 per share, which is payable on December 15, 2017, 2023to shareholders of record as of December 1, 2017.2023.
On January 25, 2023, FNCB's Board of Directors authorized a stock repurchase program under which up to 750,000 shares of FNCB's outstanding common stock may be acquired in the open market which commenced on March 3, 2023, and will expire on December 31, 2023, pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Exchange Act. Under the program, shares are purchased from time to time at prevailing market prices, through open market transactions depending upon market conditions and administered through an independent broker. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan. Under the program, the purchases will be funded from available working capital presently available to FNCB, and the repurchased shares will be returned to the status of authorized but unissued shares of common stock. There isnot a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue the plan at any time that management determines additional repurchases are no longer warranted. As of September 30, 2023, FNCB did not repurchase any shares under this program.
The holding company is considered a small bank holding company and is exempt from risk-based capital and leverage rules, including Basel III. FNCB and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on FNCB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FNCB and the Bank must meet specific capital guidelines that involve quantitative measures of FNCB's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices must be met. Capitalpractices. FNCB's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of September 30, 2023 and December 31, 2022, that FNCB and the Bank met all applicable capital adequacy requirements.
Current quantitative measures established by regulation to ensure capital adequacy require FNCBthe Bank to maintain minimum amounts and ratios (set forth in the tables below) of totalTotal capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).
The The following tables present summary information regarding FNCB’s and the Bank’s risk-based capital and related ratios at September 30, 20172023 and December 31, 2016:2022:
Consolidated | Bank Only | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum To Be Well Capitalized Under Prompt Corrective Action Regulations* | FNCB Bank | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations | ||||||||||||||||||||||||||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||||||||||||||||||||||||||||||
September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 101,767 | 12.17 | % | $ | 105,545 | 12.65 | % | 8.00 | % | 9.25 | % | 10.00 | % | $ | 181,794 | 13.21 | % | 8.00 | % | 10.50 | % | 10.00 | % | ||||||||||||||||||||||||
Tier I capital (to risk-weighted assets) | 90,132 | 10.78 | % | 96,410 | 11.55 | % | 6.00 | % | 7.25 | % | 8.00 | % | 168,156 | 12.21 | % | 6.00 | % | 8.50 | % | 8.00 | % | |||||||||||||||||||||||||||
Tier I common equity (to risk-weighted assets) | 83,568 | 10.00 | % | 96,410 | 11.55 | % | 4.50 | % | 5.75 | % | 6.50 | % | 168,156 | 12.21 | % | 4.50 | % | 7.00 | % | 6.50 | % | |||||||||||||||||||||||||||
Tier I capital (to average assets) | 90,132 | 8.10 | % | 96,410 | 8.67 | % | 4.00 | % | 4.00 | % | 5.00 | % | 168,156 | 9.11 | % | 4.00 | % | 4.00 | % | 5.00 | % | |||||||||||||||||||||||||||
Total risk-weighted assets | 836,083 | 834,519 | 1,376,706 | |||||||||||||||||||||||||||||||||||||||||||||
Total average assets | 1,112,539 | 1,112,246 | 1,846,243 |
Consolidated | Bank Only | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum To Be Well Capitalized Under Prompt Corrective Action Regulations* | ||||||||||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
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 | % | 6.50 | % | ||||||||||||||||
Tier I capital (to average assets) | 82,159 | 7.53 | % | 94,118 | 8.63 | % | 4.00 | % | 4.00 | % | 5.00 | % | ||||||||||||||||
Total risk-weighted assets | 803,026 | 802,610 | ||||||||||||||||||||||||||
Total average assets | 1,090,665 | 1,090,550 |
|
FNCB Bank | Minimum Required For Capital Adequacy Purposes | Minimum Required For Capital Adequacy Purposes with Conservation Buffer | Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations | |||||||||||||||||
(dollars in thousands) | Amount | Ratio | Ratio | Ratio | Ratio | |||||||||||||||
December 31, 2022 | ||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 169,984 | 13.11 | % | 8.00 | % | 10.50 | % | 10.00 | % | ||||||||||
Tier I capital (to risk-weighted assets) | 154,842 | 11.94 | % | 6.00 | % | 8.50 | % | 8.00 | % | |||||||||||
Tier I common equity (to risk-weighted assets) | 154,842 | 11.94 | % | 4.50 | % | 7.00 | % | 6.50 | % | |||||||||||
Tier I capital (to average assets) | 154,842 | 8.77 | % | 4.00 | % | 4.00 | % | 5.00 | % | |||||||||||
Total risk-weighted assets | 1,296,618 | |||||||||||||||||||
Total average assets | 1,765,251 |
Note 11.13. Fair Value Measurements
In determining fair value, FNCB uses various valuation approaches, including market, income and cost approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of FNCB. Unobservable inputs reflect FNCB’s knowledge about the assumptions the market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). A financial asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
● | Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active |
● | 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 |
● | 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.
Available-for-Sale Debt 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 FNCB’s investments in obligations of U.S Treasury securities, U.S. government agencies, obligations of state and political subdivisions, government-sponsored agency CMOs and mortgage-backed securities, corporate debt securities,private collateralized mortgage obligations, asset-backed securities and negotiable certificates of deposit are obtained by FNCB from a nationally-recognizednationally recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing (Level 2 inputs), to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider observable data that may include, among other things, dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, and are based on market data obtained from sources independent from FNCB. The Level 2 investments in FNCB’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. Management has determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in FNCB’s portfolio are not exchange-traded, and such non-exchange-traded fixed income securities are typically priced by correlation to observed market data. FNCB has reviewed the pricing service’s methodology to confirm its understanding that such methodology results in a valuation based on quoted market prices for similar instruments traded in active markets, quoted markets for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which the significant assumptions can be corroborated by market data as appropriate to a Level 2 designation.
For those securities for which the inputs used by an independent pricing service were derived from unobservable market information, FNCB evaluated the appropriateness and quality of each price. Management reviewed the volume and level of activity for all classes of securities and attempted to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value (fair values based on Level 3 inputs). If applicable, the adjustment to fair value was derived based on present value cash flow model projections obtained from third party providers using assumptions similar to those incorporated by market participants.
At September 30, 2017,2023, FNCB owned four30 corporate debt securities with an aggregate amortized cost and fair value of $5.0$35.1 million and $5.5$30.7 million, respectively. TheAt September 30, 2023, the market for thesefour corporate debt securities at September 30, 2017with an amortized cost and fair value of $8.0 million and $6.7 million, respectively, was not active and marketsbased on transaction criteria for similar securities are also not active.instruments. FNCB obtained valuations for these securities from a third-partythird-party service provider that prepared the valuations using a discounted cash flow approach.market approach that involves identifying a population of transactions for similar instruments and incorporating an evaluation to capture credit risk associated with these bonds. Management takes measures to validate the service provider’sproviders’ analysis and is actively involved in the valuation process, including reviewing and verifying the assumptionspopulation and evaluation of credit risk. Management believes this approach to be a conservative approach as it takes into consideration securities that have longer maturities or longer call dates, issuers with smaller asset sizes, and securities with smaller issue amounts. These factors are typically considered to be factors that would add credit spread to a bond, thus resulting in a higher required yield. Management believes the valuation results from this market approach to be consistent with pricing and data for similar deals at September 30, 2023. FNCB considers the inputs used in the valuation calculations. Results of a discounted cash flow test are significantly affected by variables such as the estimate of the probability of default, estimates of future cash flows, discount rates, prepayment rates and the creditworthiness of the underlying issuers. FNCB considers these inputsmarket approach to be unobservable Level 3 inputs because, theywhile inputs are based on estimates aboutactual transactions, the assumptions market participants would use in pricing this typerelative number of asset and developed based on the best information availabletransactions in the circumstances rather than on observable inputs. As it relatespopulation is small and subjective assumptions are used in considering factors considered to fair value measurements, once each issuer is categorized andincorporate credit spreads into the forecasted default rates have been applied, the expected cash flows are modeled using the variables described above. Discount rates ranging from 5.54% to 6.29% were applied to the expected cash flows to estimate fair value.price determination. Management will continue to monitor the market for these securities to assess the market activity and the availability of observable inputs and will continue to apply these controls and procedures to the valuations received from its third-partyFNCB's third-party service provider for the period it continues to use an outside valuation service.
Loansprovider.
Except for collateral-dependent impaired loans,Equity Securities
The estimated fair values of loansequity securities are estimateddetermined 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 flowsobtaining quoted prices on nationally recognized exchanges (Level 1 inputs).
Derivative Contracts
FNCB's derivative liabilities 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 loansreported at fair value on a recurring basis. However,utilizing Level 2 inputs. Values of these instruments are obtained through an independent pricing source utilizing information which may include market observed quotations for swaps, interest rates, forward rates and rate volatility. Derivative contracts create exposure to interest rate movements as well as risks 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 valuepotential of non-performance 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 the FHLB of Pittsburgh is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.
Equity Investment without a Readily Determinable Fair Value
During the third quarter of 2017, FNCB purchased $1.2 million, representing approximately 4.9%, of the common stock of a privately-held bank holding company. The common stock was purchased as part of a private placement pursuant to an exemption from the registration requirements of the Securities Act of 1933 for offerings not involving any public offering. The common stock is not currently traded on any established market, and is not expected to be traded in the near future on any securities exchange or established over-the-counter market. FNCB has elected to account for this transaction as an investment in an equity security without a readily determinable fair value. An equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value. The $1.2 million investment is included in other assets in the consolidated statements of financial condition at September 30, 2017. Management engaged an independent third party to provide a valuation of this investment as of September 30, 2017. The valuation indicated that the investment is not impaired, and accordingly, no adjustment for impairment is required at September 30, 2017.
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.counterparty.
Commitments to Extend CreditAssets 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.
Assets Measured Liabilities Measured at Fair Value on a Recurring BasisRecurring Basis
The following tables present the financial assets and liabilities that arewere measured at fair value on a recurring basis at September 30, 20172023, and December 31, 2016,2022, and the fair value hierarchy of the respective valuation techniques utilized by FNCB to determine the fair value:
Fair Value Measurements at September 30, 2017 | ||||||||||||||||||||||||||||||||
Significant | Significant | |||||||||||||||||||||||||||||||
Quoted Prices | Other | Other | Fair Value Measurements at September 30, 2023 | |||||||||||||||||||||||||||||
in Active Markets | Observable | Unobservable | Quoted Prices in Active Markets | Significant Other Observable | Significant Other Unobservable | |||||||||||||||||||||||||||
for Identical Assets | Inputs | Inputs | for Identical Assets | Inputs | Inputs | |||||||||||||||||||||||||||
(in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||
U.S. treasuries | $ | 31,943 | $ | - | $ | 31,943 | $ | - | ||||||||||||||||||||||||
Obligations of state and political subdivisions | 144,700 | - | 144,700 | - | 190,339 | - | 190,339 | - | ||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 35,272 | - | 35,272 | - | 73,291 | - | 73,291 | - | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 66,459 | - | 66,459 | - | 3,305 | - | 3,305 | - | ||||||||||||||||||||||||
Mortgage-backed securities | 22,522 | - | 22,522 | - | 16,131 | - | 16,131 | - | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 69,933 | - | 69,933 | - | ||||||||||||||||||||||||||||
Corporate debt securities | 5,445 | - | - | 5,445 | 30,678 | - | 23,962 | 6,716 | ||||||||||||||||||||||||
Asset-backed securities | 3,512 | - | 3,512 | - | 20,864 | - | 20,864 | - | ||||||||||||||||||||||||
Negotiable certificates of deposit | 3,192 | - | 3,192 | - | 658 | - | 658 | - | ||||||||||||||||||||||||
Equity securities | 935 | 935 | - | - | ||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 282,037 | $ | 935 | $ | 275,657 | $ | 5,445 | ||||||||||||||||||||||||
Subtotal available-for-sale debt securities | 437,142 | - | 430,426 | 6,716 | ||||||||||||||||||||||||||||
Equity securities, at fair value | 6,104 | 6,104 | - | - | ||||||||||||||||||||||||||||
Derivative assets | 3,599 | - | 3,599 | - | ||||||||||||||||||||||||||||
Total financial assets | $ | 446,845 | $ | 6,104 | $ | 434,025 | $ | 6,716 | ||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Derivative liabilities | $ | 1,670 | $ | - | $ | 1,670 | $ | - | ||||||||||||||||||||||||
Total financial liabilities | $ | 1,670 | $ | - | $ | 1,670 | $ | - |
Fair Value Measurements at December 31, 2016 | ||||||||||||||||||||||||||||||||
Significant | Significant | |||||||||||||||||||||||||||||||
Quoted Prices | Other | Other | ||||||||||||||||||||||||||||||
in Active Markets | Observable | Unobservable | Fair Value Measurements at December 31, 2022 | |||||||||||||||||||||||||||||
for Identical Assets | Inputs | Inputs | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Other Unobservable Inputs | |||||||||||||||||||||||||||
(in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Obligations of U.S. government agencies | $ | 12,188 | $ | - | $ | 12,188 | $ | - | ||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||||||||||||||||||
U.S. treasuries | $ | 32,134 | $ | - | $ | 32,134 | $ | - | ||||||||||||||||||||||||
Obligations of state and political subdivisions | 117,873 | - | 117,873 | - | 220,782 | - | 220,782 | - | ||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 18,084 | - | 18,084 | - | 80,407 | - | 80,407 | - | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 99,350 | - | 99,350 | - | 3,329 | - | 3,329 | - | ||||||||||||||||||||||||
Mortgage-backed securities | 20,576 | - | 20,576 | - | 20,663 | - | 20,663 | - | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 72,507 | - | 72,507 | - | ||||||||||||||||||||||||||||
Corporate debt securities | 3,792 | - | 453 | 3,339 | 30,672 | - | 22,736 | 7,936 | ||||||||||||||||||||||||
Asset-backed securities | - | - | - | - | 14,941 | - | 14,941 | - | ||||||||||||||||||||||||
Negotiable certificates of deposit | 3,216 | - | 3,216 | - | 656 | - | 656 | - | ||||||||||||||||||||||||
Equity securities | 936 | 936 | - | - | ||||||||||||||||||||||||||||
Total available-for-sale securities | $ | 276,015 | $ | 936 | $ | 271,740 | $ | 3,339 | ||||||||||||||||||||||||
Subtotal available-for-sale debt securities | 476,091 | - | 468,155 | 7,936 | ||||||||||||||||||||||||||||
Equity securities, at fair value | 7,717 | 7,717 | - | - | ||||||||||||||||||||||||||||
Derivative assets | 2,104 | - | 2,104 | |||||||||||||||||||||||||||||
Total financial assets | $ | 485,912 | $ | 7,717 | $ | 470,259 | $ | 7,936 | ||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Derivative liabilities | $ | 931 | $ | - | $ | 931 | $ | - | ||||||||||||||||||||||||
Total financial liabilities | $ | 931 | $ | - | $ | 931 | $ | - |
There were no transferstwo corporate debt securities transferred between hierarchy levels within the fair value hierarchy during the nine months ended September 30, 2017 2023, and 2016.there was one corporate debt security transferred from Level 3 hierarchy to Level 2 during the nine months ended September 30, 2022. Prior to the transfer from Level 3 to Level 2, the market for the transferred securities was not active and management obtained fair values of the securities from an independent third party. The valuation methods employed utilized significant other unobservable inputs in determining fair values. Subsequently, in the period of transfer, management was able to obtain fair values for these securities from the independent pricing service used to price the remainder of the portfolio using significant other observable inputs.
The following table presents a reconciliation and consolidated statement of operations classificationclassifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)3), which consisted entirely of corporate debt securities, for the three and nine months ended September 30, 2017:2023 and 2022.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||
Corporate Debt Securities | ||||||||
(in thousands) | 2017 | 2016 | ||||||
Balance at December 31, | $ | 3,339 | $ | 3,269 | ||||
Additions | 2,000 | - | ||||||
Payments received | - | - | ||||||
Total gains or losses (realized/unrealized): | ||||||||
Included in earnings | - | - | ||||||
Included in other comprehensive income | 106 | 207 | ||||||
Balance at September 30, | $ | 5,445 | $ | 3,476 |
Fair Value Measurements | ||||||||||||||||
Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Corporate Debt Securities | Corporate Debt Securities | |||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Balance, beginning of period | $ | 6,599 | $ | 8,030 | $ | 7,936 | $ | 12,345 | ||||||||
Additions | - | - | - | - | ||||||||||||
Redemptions | - | - | - | (2,066 | ) | |||||||||||
Transfer to Level 2 | - | - | (853 | ) | (756 | ) | ||||||||||
Sales | - | - | - | - | ||||||||||||
Total gains (losses) (realized/unrealized): | ||||||||||||||||
Included in earnings | - | - | - | - | ||||||||||||
Included in other comprehensive loss | 117 | (370 | ) | (367 | ) | (1,863 | ) | |||||||||
Balance at September 30, | $ | 6,716 | $ | 7,660 | $ | 6,716 | $ | 7,660 |
Assets Measured Measured at Fair Value on a Non-Recurring BasisNon-Recurring Basis
The following tables present assetsassets and liabilities measured at fair value on a non-recurring basis at September 30, 2017 and December 31, 2016,2023 and additional quantitative information about the valuation techniques and inputs utilized by FNCB to determine fair value. All such assets were measured using Level 3 inputs.
September 30, 2017 | ||||||||||||||||||||
Fair Value Measurement | Quantitative Information | |||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | |||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | ||||||||||||||
Impaired loans - collateral dependent | $ | 1,179 | $ | 615 | $ | 564 | Appraisal of collateral | Selling cost | 10.0% | |||||||||||
Impaired loans - other | 4,554 | 157 | 4,397 | Discounted cash flows | Discount rate | 3.0% | - | 7.5% | ||||||||||||
Other real estate owned | 1,053 | - | 1,053 | Appraisal of collateral | Selling cost | 10.0% |
September 30, 2023 | |||||||||||||||||||
Fair Value Measurement | Quantitative Information | ||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | ||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | |||||||||||||
Individually evaluated loans - collateral dependent | $ | 4,072 | $ | 195 | $ | 3,877 | Appraisal of collateral | Selling costs | 10.0 | % | |||||||||
Individually evaluated loans - other | 582 | - | 582 | Discounted cash flows | Discount rate | 4.50% - 10.00% |
The following tables present assets and liabilities measured at fair value on a non-recurring basis at December 31, 2022, prior to the adoption of ASU 2016-13, and additional quantitative information about the valuation techniques and inputs utilized by FNCB to determine fair value. All assets were measured using Level 3 inputs.
December 31, 2016 | ||||||||||||||||||||
Fair Value Measurement | Quantitative Information | |||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | |||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | ||||||||||||||
Impaired loans - collateral dependent | $ | 482 | $ | 68 | $ | 414 | Appraisal of collateral | Selling cost | 10.0% | |||||||||||
Impaired loans - other | 3,247 | 234 | 3,013 | Discounted cash flows | Discount rate | 3.0% | - | 7.5% | ||||||||||||
Other real estate owned | 1,949 | - | 1,949 | Appraisal of collateral | Selling cost | 10.0% |
December 31, 2022 | |||||||||||||||||||
Fair Value Measurement | Quantitative Information | ||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | ||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | |||||||||||||
Individually evaluated loans - collateral dependent | $ | 1,902 | $ | 8 | $ | 1,894 | Appraisal of collateral | Selling costs | 10.0 | % | |||||||||
Individually evaluated loans - other | 5,698 | 26 | 5,672 | Discounted cash flows | Discount rate | 3.00% - 10.25% |
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 toadjust the appraised valuevalues 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 loancredit losses.
The following table summarizes the estimated fair values of FNCB’s financial instruments using an exit price notion at September 30, Fair Value September 30, 2017 December 31, 2016 Fair Value September 30, 2023 December 31, 2022 (in thousands) Measurement Carrying Value Fair Value Carrying Value Fair Value Measurement Carrying Value Fair Value Carrying Value Fair Value Financial assets Cash and short term investments Level 1 Securities available for sale See previous table FHLB of Pittsburgh stock Level 2 Financial assets: Cash and cash equivalents Level 1 Available-for-sale debt securities See previous table Equity securities Level 1 Restricted stock Level 2 Loans held for sale Level 2 Level 2 Loans, net Level 3 Loans and leases, net Level 3 Accrued interest receivable Level 2 Level 2 Equity securities without readily determinable fair values Level 3 Servicing rights Level 3 Level 3 Derivative assets Level 2 Financial liabilities Financial liabilities: Deposits Level 2 Level 2 Borrowed funds Level 2 Level 2 Accrued interest payable Level 2 Level 2 Derivative liabilities Level 2 Note For FNCB, The following table presents the calculation of both basic and diluted earnings per share of common Three Months Ended Nine Months Ended September 30, September 30, Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except share data) 2017 2016 2017 2016 2023 2022 2023 2022 Net income Basic weighted-average number of common shares outstanding Plus: Common share equivalents Diluted weighted-average number of common shares outstanding Income per common share: Basic Diluted Note The following tables summarize the reclassifications out of accumulated other comprehensive (loss) income Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017 Amount Reclassifed Amount Reclassifed from Accumulated from Accumulated Other Comprehensive Affected Line Item in the Other Comprehensive Affected Line Item in the Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 (in thousands) Income (Loss) Consolidated Statements of Income Income (Loss) Consolidated Statements of Income Amount Reclassified from Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Consolidated Statements of Income Amount Reclassified from Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Consolidated Statements of Income Available-for-sale securities: Net gains on sale of securities reclassified into net income Net gain on sale of securities Net gain on sale of securities Available-for-sale debt securities: Reclassification adjustment for net gains reclassified into net income Net gain (loss) on the sale of available-for-sale debt securities Net gain (loss) on the sale of available-for-sale debt securities Taxes Income taxes Income taxes Income taxes Income taxes Net of tax amount Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016 Amount Reclassifed Amount Reclassifed from Accumulated from Accumulated Other Comprehensive Affected Line Item in the Other Comprehensive Affected Line Item in the (in thousands) Income (Loss) Consolidated Statements of Income Income (Loss) Consolidated Statements of Income Available-for-sale securities: Net gains on sale of securities reclassified into net income Net gain on sale of securities Net gain on sale of securities Taxes Income taxes Income taxes Net of tax amount Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 (in thousands) Amount Reclassified from Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Consolidated Statements of Income Amount Reclassified from Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Consolidated Statements of Income Available-for-sale debt securities: Reclassification adjustment for net losses reclassified into net income Net gain (loss) on the sale of available-for-sale debt securities Net gain (loss) on the sale of available-for-sale debt securities Taxes Income taxes Income taxes Net of tax amount The following table summarizes the changes in accumulated other comprehensive (loss) income, Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2017 2016 2017 2016 Beginning balance Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive income Net other comprehensive income during the period Ending balance Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Balance, beginning of period Other comprehensive loss before reclassifications Amount reclassified from accumulated other comprehensive (loss) income Net other comprehensive loss during the period Balance, end of period Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in the Annual Report on Form 10-K for the year ended December 31, FNCB FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION FNCB may from time to time make written or oral “forward-looking statements,” including statements contained in These forward-looking statements include statements with respect to FNCB’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, including statements with respect to future changes in monetary policy or interest rates, or new product offerings and the anticipated merger between FNCB and Peoples Financial Services Corp., (“PFIS”) under the Agreement and Plan of Merger, dated September 27, 2023 (the “Merger Agreement”) pursuant to which FNCB will merge with and into PFIS, with PFIS as the surviving entity, along with the transaction occurring immediately after such merger, whereby FNCB’s wholly owned subsidiary, FNCB Bank (the “Bank”) will merge with and into Peoples Security Bank and Trust Company (“Peoples Bank”), with Peoples Bank as the surviving bank and a wholly-owned subsidiary of PFIS, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond our control). The words “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” 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. Any references to FNCB's website, www.fncb.com or any variation thereof, shall not incorporate the contents of such website into this Report. CRITICAL ACCOUNTING POLICIES In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates. 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 Allowance for As of January 1, 2023, FNCB adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” which replaced the current loss impairment methodology under GAAP with a methodology that reflects expected credit losses and Management evaluates the credit quality of FNCB’s loan portfolio on an ongoing basis and performs a formal review of the adequacy of the Determining the amount of the See Securities Valuation and Evaluation for Impairment Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (Level 1) or quoted prices for similar assets or models using inputs that are observable, either directly or indirectly (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of observable inputs or if markets are illiquid, valuation techniques are used to determine fair value of any investments that require inputs that are both unobservable and significant to the fair value measurement (Level 3). For Level 3 inputs, valuation techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on FNCB’s financial condition or results of operations. See Note 3, “Securities” and Note 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 FNCB records an income tax provision or benefit based on the amount of 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 September 30, Refer to Note New Authoritative Accounting Guidance and Accounting Guidance to be Adopted in Future Periods Refer to Note 2, “New Authoritative Accounting Executive Summary The following overview should be read in conjunction with this MD&A in its entirety. The Federal Open Market Committee ("FOMC") continued to tighten monetary policy through the On September 27, 2023, FNCB entered into the Merger Agreement with PFIS pursuant to which FNCB will merge with and into PFIS, with PFIS as the surviving entity. Immediately after such merger, the Bank FNCB recorded consolidated net income of Net income for the nine months ended September 30, For the three and nine months ended September 30, Total assets increased $81.2 million, or 4.7%, to $1.827 billion at September 30, 2023 from $1.746 billion at December 31, 2022. The change in total assets primarily reflected increases in loans and leases and cash and cash equivalents, partially offset by a decrease in available-for-sale debt securities, as security repayments were used to fund loan originations. Loans and leases, net of the ACL, increased $83.5 million, or 7.5%, to $1.194 billion at September 30, 2023 from $1.110 billion at December 31, 2022. The increase in loans and leases was largely concentrated in commercial and industrial loans reflecting strong demand for the equipment financing product offering. Cash and cash equivalents increased $35.2 million, or 83.9%, to $77.1 million at September 30, 2023, from $41.9 million at December 31, 2022. Available-for-sale debt securities decreased $39.0 million, or 8.2%, to $437.1 millionat September 30, 2023 from $476.1 million at December 31, 2022. Total deposits increased $81.7 million, or 5.8%, to $1.502 billion at September 30, 2023 from $1.421 billion at December 31, 2022. Total borrowed funds outstanding at September 30, 2023, were $186.7 million, an increase of $4.3 million, or 2.4%, from $182.4 million at December 31, 2022. Total shareholders’ equity decreased$1.1 million, or 1.0%, to $117.8 million at September 30, 2023 from $118.9 million at December 31, 2022. The decrease in shareholders' equity was primarily Management Focus in 2023 In addition to directing the steps necessary to close the transactions contemplated by the Merger Agreement, including seeking the required regulatory, shareholder or other approvals, management will continue to stay focused on prudent balance sheet and liquidity management, managing interest rate risk and controlling funding costs in a rising market rate environment, while continuing to evaluate opportunities to enhance net interest income and non-interest income Summary of Performance Net Interest Income Net interest income, In response to competition within our market area and rate-sensitivity of Net interest income for both the quarter and year-to-date periods was impacted by the rapid rise in funding costs, coupled with greater reliance on higher costing wholesale funding and deposit migration from non-maturity deposits into time deposits. Net interest income on a tax-equivalent basis The significant increase in interest expense of $7.3 million was primarily due to an increase in funding costs, coupled with growth in average interest-bearing liabilities. FNCB increased deposit rates and offered several certificate of The The $16.7 million, or 37.8%, increase in year-to-date tax-equivalent interest income was largely due to higher earning-asset yields, coupled with an increase in average earning assets balances, primarily loans. The tax-equivalent yield on average earning assets increased 104 basis points to 4.68% for the first nine months of 2023 from 3.64% for the same period of 2022, which resulted in a Three Months Ended Three Months Ended September 30, 2017 September 30, 2016 September 30, 2023 September 30, 2022 Average Yield/ Average Yield/ Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost Assets Earning assets (2)(3) Loans-taxable (4) Loans-tax free (4) Loans and leases - taxable (4) Loans and leases - tax free (4) Total loans (1)(2) Securities-taxable Securities-tax free Total securities (1)(5) Interest-bearing deposits in other banks Interest-bearing deposits in other banks and federal funds sold Total earning assets Non-earning assets Allowance for loan and lease losses Allowance for credit losses Total assets Liabilities and shareholders' equity Liabilities and Shareholders' Equity Interest-bearing liabilities Interest-bearing demand deposits Savings deposits Time deposits Total interest-bearing deposits Borrowed funds and other interest-bearing liabilities Total interest-bearing liabilities Demand deposits Other liabilities Shareholders' equity Total liabilities and shareholder's equity Net interest income/interest rate spread (6) Tax-equivalent adjustment Tax equivalent adjustment Net interest income as reported Net interest margin (7) (1) Interest income is presented on a (2) Loans and leases are stated net of unearned income. (3) (4) (5) The yields for securities that are classified as available for sale is based on the average historical amortized cost. (6) Interest rate spread represents the difference between the average yield on interest earning assets and the cost of (7) Net interest income as a percentage of total average interest Nine Months Ended Nine Months Ended September 30, 2017 September 30, 2016 September 30, 2023 September 30, 2022 Average Yield/ Average Yield/ Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost Assets Earning assets (2)(3) Loans-taxable (4) Loans-tax free (4) Loans and leases - taxable (4) Loans and leases - tax free (4) Total loans (1)(2) Securities-taxable Securities-tax free Total securities (1)(5) Interest-bearing deposits in other banks Interest-bearing deposits in other banks and federal funds sold Total earning assets Non-earning assets Allowance for loan and lease losses Total assets Liabilities and shareholders' equity Liabilities and Shareholders' Equity Interest-bearing liabilities Interest-bearing demand deposits Savings deposits Time deposits Total interest-bearing deposits Borrowed funds and other interest-bearing liabilities Total interest-bearing liabilities Demand deposits Other liabilities Shareholders' equity Total liabilities and shareholder's equity Net interest income/interest rate spread (6) Tax-equivalent adjustment Tax equivalent adjustment Net interest income as reported Net interest margin (7) (1) Interest income is presented on a (2) Loans and leases are stated net of unearned income. (3) (4) (5) The yields for securities that are classified as available for sale is based on the average historical amortized cost. (6) Interest rate spread represents the difference between the average yield on interest earning assets and the cost of (7) Net interest income as a percentage of total average interest earning assets. 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 The following table summarizes the effect that changes in volumes of earning assets and interest-bearing liabilities and the interest rates earned and paid on these assets and liabilities have on net interest income. The net change or mix component attributable to the combined impact of rate and volume changes has been allocated proportionately to the change due to volume and the change due to rate. Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30, 2017 vs. 2016 2017 vs. 2016 2023 vs. 2022 2023 vs. 2022 Increase (Decrease) Increase (Decrease) Increase (Decrease) Increase (Decrease) Due to Due to Total Due to Due to Total Due to Due to Total Due to Due to Total (dollars in thousands) Volume Rate Change Volume Rate Change (in thousands) Volume Rate Change Volume Rate Change Interest income: Loans - taxable Loans - tax free Loans and leases - taxable Loans and leases - tax free Total loans Securities - taxable Securities - tax free Total securities Interest-bearing deposits in other banks Interest-bearing deposits in other banks and federal funds sold Total interest income Interest expense: Interest-bearing demand deposits Savings deposits Time deposits Total interest-bearing deposits Borrowed funds and other interest-bearing liabilities Total interest expense Net interest income Provision for The provision for credit losses is an expense charged against net interest income to provide for probable losses attributable to uncollectible loans and leases and is based on management’s analysis of the adequacy of the ACL. A release of reserves, resulting in a credit to the provision for credit losses, reflects the reversal of amounts previously charged to the ACL. Management closely monitors the loan portfolio and the adequacy of the provisioning as appropriate. FNCB recorded a credit to the provision for Non-interest Income For the nine months ended September 30, Non-interest Expense Non-interest expense increased $268 thousand, or 3.0%, to $9.3 million for the three months ended September 30, 2023, from $9.0 million for the three months ended September 30, 2022, which primarily reflected increases in salaries and benefits and merger and acquisition costs. Salaries and benefits increased $354 thousand, or 7.7%, to $4.9 million for the three months ended September 30, 2023, compared to $4.6 million for the same three-month period of 2022. This increase was coupled with $537 thousand in merger and acquisition costs recorded in the third quarter of 2023, which primarily included legal fees, coupled with data room charges, associated with the Merger Agreement. These increases were partially offset by a favorable change in the provision for unfunded commitments. FNCB recorded a credit for unfunded commitments of $235 thousand for the third quarter of 2023, compared to a provision for unfunded commitments of $338 thousand, for the respective quarter of 2022 due to a decrease in unfunded commitment balances. For the nine months ended September 30, 2023, non-interest expense increased $515 thousand, or 2.0%, to $26.3 million, from $25.8 million for the same nine-month period of 2022, which was largely due to increases in salaries and employee benefits, merger and acquisition expenses and other non-interest expenses. Salaries and employee benefits increased $1.1 million, or Provision for Income Taxes FNCB recorded FINANCIAL CONDITION Assets Total assets Cash and Cash Equivalents Cash and cash equivalents Securities At September 30, The September 30, December 31, (in thousands) 2017 2016 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 - commerical Mortgage-backed securities Corporate debt securities Asset-backed securities Negotiable certificates of deposit Equity securities Total The following table presents the Composition of Available-for-Sale Debt Securities September 30, 2023 December 31, 2022 (dollars in thousands) Fair Value % of Portfolio Fair Value % of Portfolio Available-for-sale debt securities: U.S. treasuries Obligations of state and political subdivisions U.S. government/government-sponsored agencies: Collateralized mortgage obligations - residential Collateralized mortgage obligations - commercial Mortgage-backed securities Private collateralized mortgage obligations Corporate debt securities Asset-backed securities Negotiable certificates of deposit Total available-for-sale debt securities Available-for-sale debt securities decreased $39.0 million, or 8.2%, to $437.1 million at September 30, 2023 from $476.1 million at December 31, 2022, as the majority of funds received from sales, maturities and repayments were redirected to fund loan demand. During the nine months ended September 30, 2023, FNCB sold twelve tax-exempt municipal debt securities, with an aggregate amortized cost of $10.1 million and a weighted average yield of 3.85%. Gross proceeds received from the sales totaled $10.4 million. FNCB realized a net gain of $252 thousand upon the sale, which is included in non-interest income in the consolidated statements of income. Purchases of available-for-sale debt securities during the nine months ended September 30, 2023 included one corporate debt security with a principal balance of $1.5 million, four private CMOs with a total principal balance of $5.9 million and four private asset-backed securities with a total principal balance of $7.5 million. The purchases had a weighted-average yield of 8.04%. Management continually monitors the investment portfolio for credit worthiness, value, and yield. Semi-annually, management engages a third-party consultant to review the municipal portfolio to determine if there is any undue credit risk within the portfolio. As part of the independent review, each security is compared to their "portfolio credit benchmark" to identify which securities may contain more than a minimal risk of payment default. Based on their semi-annual review as of June 30, 2023, the third-party consultant concluded that each municipal security held within the portfolio met or exceeded the benchmark and that none of the securities required further review. The next third-party review is scheduled for December 31, 2023. Management also monitors municipal securities monthly using a third-party Municipal Surveillance Report that identifies events related to the issuer that may indicate a deterioration in credit quality. Management noted no events that would indicate a deterioration in credit quality of any issuer during the first nine months of 2023. The following table presents the weighted-average yields of Maturity Distribution of September 30, 2017 Collateralized Mortgage Obligations, Mortgage-Backed Within >1 - 5 a6 - 10 Over and Asset-Backed No Fixed (dollars in thousands) One Year Years Years 10 Years Securities Maturity Total Available-for-sale securities 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 Asset-backed securities Yield Negotiable certificates of deposit Yield Equity securities Yield Total available-for-sale maturities Weighted average yield September 30, 2023 Within One Year >1 - 5 Years 6 - 10 Years Over 10 Years Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities Total Available-for-sale debt securities: U.S. treasuries Obligations of state and political subdivisions U.S. government/government-sponsored agencies: Collateralized mortgage obligations - residential Collateralized mortgage obligations - commercial Mortgage-backed securities Private collateralized mortgage obligations Corporate debt securities Asset-backed securities Negotiable certificates of deposit Weighted average yield See Note 3, For comparative purposes, loan and lease balances by loan segment at December 31, 2022 are presented net of deferred loan origination fees and costs and unearned income in Total loans and leases, net of Commercial real estate loans increased $3.4 million, or 0.9%, to $379.7 million at September 30, 2023 from $376.3 million at December 31, 2022. Commercial real estate loans include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. Commercial and industrial loans Residential Consumer loans September 30, December 31, (in thousands) 2017 2016 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 The following table presents Loan September 30, 2017 December 31, 2016 (dollars in thousands) Amount % of Gross Loans Amount % of Gross Loans Retail space/shopping centers 1-4 family residential investment properties Automobile dealers September 30, 2023 December 31, 2022 (dollars in thousands) Amount % of Total Loans, Gross Amount % of Total Loans, Gross Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Consumer State and political subdivisions Total loans and leases (1) Unearned income Net deferred origination fees Allowance for credit losses Loans and leases, net (1) In accordance with the adoption of ASU 2016-13, September 30, 2023 balances are reported at the amortized cost basis, to include net deferred origination fees and unearned income. 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 FNCB has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of the Chief Banking Officer, Chief Lending Officer and loan officers, the Chief Credit Officer, the loan review function, and the Credit Risk Management, ACL, Officers Loan and Under FNCB’s risk rating system, loans that are rated pass, special mention, substandard, doubtful, or loss are reviewed regularly as part of the risk management practices. The Credit Risk Management Committee, which consists of key members of management Non-performing loans are monitored on an ongoing basis as part of FNCB’s loan review process. Additionally, work-out Management actively manages The following Non-performing Assets September 30, December 31, September 30, December 31, (in thousands) 2017 2016 (dollars in thousands) 2023 2022 Non-accrual loans 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 loans Non-performing loans as a percentage of total loans Non-performing assets as a percentage of total assets Allowance for credit losses as a percentage of total loans and lease, net Allowance for credit losses to non-accrual loans and leases Allowance for credit losses to non-performing loans and leases Allowance for credit losses to non-performing assets Other non-performing assets The following table presents the changes in non-performing loans for thethree and nine months ended September 30, Changes in Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2017 2016 2017 2016 2023 2022 2023 2022 Balance, beginning of period Loans newly placed on non-accrual Changes in loans past due 90 days or more and still accruing Loans transferred to OREO Loans returned to performing status Change in loans past due 90 days or more and still accruing Loans charged-off Loans sold Loan payments received Balance, end of period The following table Loan Delinquencies and September 30, December 31, 2017 2016 Accruing: 30-59 days 60-89 days 90+ days Non-accrual Total delinquencies September 30, December 31, 2023 2022 Accruing: 30-89 days 90+ days Non-accrual Total delinquencies Allowance for The The following table presents an allocation of the Allocation of the September 30, 2017 December 31, 2016 Percentage Percentage of Loans of Loans in Each in Each Category Category Allowance to Total Allowance to Total (dollars in thousands) Amount Loans Amount Loans Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Consumer State and political subdivision Total September 30, 2023 December 31, 2022 Percentage Percentage of Loans of Loans in Each in Each Category Category Allowance to Total Allowance to Total (dollars in thousands) Amount Loans Amount Loans Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Consumer State and political subdivisions Unallocated Total The following table presents an analysis of the Reconciliationof the For the Three Months Ended September 30, For the Nine Months Ended September 30, For the Three Months Ended September 30, For the Nine Months Ended September 30, (in thousands) 2017 2016 2017 2016 (dollars in thousands) 2023 2022 2023 2022 Balance at beginning of period Impact of ASU 2016-13 Charge-offs: Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Consumer State and political subdivisions 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 subdivisions Total recoveries Net charge-offs (recoveries) Provision (credit) for loan and lease losses Provision for credit losses Balance at end of period Net charge-offs (recoveries) as a percentage of average loans Allowance for loan and lease losses as a percentage of gross loans at period end Net charge-offs (recoveries) as a percentage of average loans and leases (annualized) Equity Total shareholders’ equity decreased$1.1 million, or 1.0%, to $117.8 million at September 30, 2023 from $118.9 million at December 31, 2022. The decrease in shareholders' equity was primarily attributable to a $7.2 million, or 14.9%, increase in the accumulated other comprehensive loss, coupled with year-to-date dividends declared of $5.3 million. Year-to-date net income of $9.6 million and cumulative effect adjustment related to the adoption of ASU 2016-13 of $1.1 million partially offset the decreases to capital. FNCB Bank was considered well capitalized with total risk-based capital and Tier 1 leverage ratios were 13.21% and 9.11% at September 30, 2023, respectively. On a The Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2017 2016 2017 2016 Balance, beginning of period Property foreclosures Valuation adjustments Carrying value of OREO sold Balance, end of period September 30, December 31, (in thousands) 2017 2016 Land / lots Commercial real estate Residential real estate Total other real estate owned Liquidity The term liquidity refers to the ability to generate The consolidated statements of cash flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and interest-bearing deposits in other banks, which comprise cash and cash equivalents, are FNCB’s most liquid assets. At September 30, Impact of Inflation and Changing Prices Interest Rate Risk Interest Rate Sensitivity Market risk is the risk to earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. FNCB’s exposure to market risk is primarily interest rate risk associated with our lending, investing and deposit gathering activities, all of which are other than trading. Changes in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. In addition, variations in interest rates affect the underlying economic value of our assets, liabilities and off-balance sheet items. LIBOR Replacement The Alternative Reference Rates Committee ("ARRC") had proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR, with the transition to SOFR from USD-LIBOR to take place by the end of 2021. On November 30, 2020 the ICE Benchmark Administration ("IBA"), which complies and oversees LIBOR, announced its intention to extend most of the USD-LIBOR tenors to June 30, 2023, with U.S. banking regulators supporting the extension. As of December 31, 2021, most LIBOR tenors, with the exception of the overnight, 1-,3-, 6- and 12-month LIBOR tenors which have been extended through June 30, 2023, have ceased to be published. Additionally, beginning January 1, 2022, no new financial instruments can be written with terms tied to LIBOR. On March 15, 2022, President Biden signed into law the “Adjustable Interest Rate (LIBOR) Act,” as part of the Consolidated Appropriations Act, 2022, which provides for a statutory transition to a replacement rate selected by the Federal Reserve based on the SOFR for contracts referencing LIBOR that contain no fallback provisions or ineffective fallback provisions, unless a replacement rate is selected by a determining person as outlined in the statute. On December 16, 2022, the Federal Reserve adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023. FNCB had various loans, investments, borrowings and interest rate swap contracts that were indexed to USD-LIBOR. As of June 30, 2023, FNCB was fully compliant with the Adjustable Interest Rate (LIBOR) Act and had transitioned substantially all of its financial instruments to an alternative benchmark rate. Asset and Liability Management 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; ● ● ● FNCB utilizes the pricing and structure of loans and deposits, the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, and various derivative financial instruments to manage interest rate risk. Derivative financial instruments may include, among others, cash flow hedges, interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to the terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See note 7, "Derivative and Hedging Transactions," of the notes to consolidated financial statements included in Item 1 hereof for additional information about FNCB's derivative financial instruments. 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, 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 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 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: ● ● ● The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points, +200 basis points, and Rates +200 Rates +400 Rates -100 Rates +200 Rates +400 Rates -200 Simulation Results Policy Limit Simulation Results Policy Limit Simulation Results Policy Limit Simulation Results Policy Limit Simulation Results Policy Limit Simulation Results Policy Limit Earnings at risk: Percent change in net interest income Economic value at risk: Percent change in economic value of equity Despite FOMC actions, inflation, while improving, has remained elevated in during the first nine months of increases, on February 1, 2023, March 2, 2023, May 3, 2023 and July 26, 2023. Additionally, the FOMC has indicated that additional rate increases in 2023 may be necessary to control inflation. Model results at September 30, 2023 indicate that FNCB's asset/liability position becomes asset sensitive in Years 2-5 of the model, which would imply that net interest income would benefit from rising interest rates. 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 As previously mentioned, as part of its Off-Balance Sheet Arrangements In the For the Item 3 — Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in FNCB’s exposure to market risk during the Item 4 — Controls and Procedures There were no changes made to FNCB’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, FNCB’s internal control over financial reporting. FNCB has been subject to tax audits, There have been no changes in the status of the other litigation, if any, disclosed in FNCB’s 2022 Annual Report. Risks Related to FNCB’s Pending Merger with PFIS Because the market price of PFIS common stock will fluctuate, the value of the merger consideration to be received by our shareholders may change. On September 27, 2023, FNCB Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met. Before the transactions contemplated by the Merger Agreement may be completed, various approvals must be obtained from bank regulatory authorities. In determining whether to grant these approvals, the applicable regulatory authorities consider a variety of factors, including the competitive impact of the proposal in the relevant geographic markets; financial, managerial and other supervisory considerations of each party; convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries under the Community Reinvestment Act of 1977 and the regulations promulgated thereunder; effectiveness of the parties in combating money laundering activities; any significant outstanding supervisory matters; and the extent to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system. These regulatory authorities may impose conditions on the granting of such approvals. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying completion of the merger or of imposing additional costs or limitations on the combined company following the merger. The regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the mergers that are not anticipated or cannot be met. Furthermore, such conditions or changes may constitute a burdensome condition that may allow PFIS to terminate the Merger Agreement and PFIS may exercise its right to terminate the Merger Agreement. If the consummation of the mergers is delayed, including by a delay in receipt of necessary regulatory approvals, the business, financial condition and results of operations of FNCB may also be materially and adversely affected. Failure of the merger to be completed, the termination of the Merger Agreement or a significant delay in the consummation of the merger could negatively impact FNCB. The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the mergers. These conditions to the consummation of the merger may not be fulfilled and, accordingly, the merger may not be completed. In addition, if the merger is not completed by September 27, 2024, either PFIS or FNCB may choose to terminate the Merger Agreement at any time after that date if the failure of the effective time to occur on or before that date is not caused by any breach of the Merger Agreement by the party electing to terminate the merger agreement. If the merger is not consummated, the ongoing business, financial condition and results of operations of FNCB may be materially adversely affected and the market price of FNCB’s common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the merger will be consummated. In addition, FNCB has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the merger is not completed, FNCB would have to recognize these expenses without realizing the expected benefits of the merger. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the merger, including the diversion of management attention from pursuing other opportunities and the constraints in the merger agreement on the ability to make significant changes to FNCB’s ongoing business during the pendency of the merger, could have a material adverse effect on FNCB’s business, financial condition and results of operations. If the Merger Agreement is terminated and FNCB’s board of directors seeks another merger or business combination, FNCB shareholders cannot be certain that FNCB will be able to find a party willing to engage in a transaction on more attractive terms than the merger with PFIS. FNCB will be subject to business uncertainties and contractual restrictions while the merger is pending. Uncertainty about the effect of the merger on employees, customers (including depositors and borrowers), suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of FNCB. These uncertainties may impair FNCB’s ability to attract, retain and motivate key personnel and customers (including depositors and borrowers) pending the consummation of the merger, as such personnel and customers may experience uncertainty about their future roles and relationships following the consummation of the merger. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with FNCB to seek to change existing business relationships with FNCB or fail to extend an existing relationship with FNCB. In addition, competitors may target FNCB’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger. The pursuit of the merger and the preparation for the integration may place a burden on FNCB’s management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on FNCB’s business, financial condition and results of operations. In addition, the Merger Agreement restricts each party from taking certain actions without the other party’s consent while the merger is pending. These restrictions could have a material adverse effect on FNCB’s business, financial condition and results of operations. The Merger Agreement contains provisions that may discourage other companies from pursuing, announcing or submitting a business combination proposal to FNCB that might result in greater value to FNCB shareholders. The Merger Agreement contains provisions that may discourage a third party from pursuing, announcing or submitting a business combination proposal to FNCB that might result in greater value to FNCB shareholders than the merger with PFIS. These provisions include a general prohibition on FNCB from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. Furthermore, if the merger agreement is terminated, under certain circumstances, FNCB may be required to pay PFIS a termination fee equal to $4.8 million. FNCB also has an obligation to submit its merger-related proposals to a vote by its shareholders, including if FNCB receives an unsolicited proposal that FNCB board of directors believes is superior to the merger, unless the merger agreement is terminated by FNCB under certain conditions described in the Merger Agreement. Litigation against FNCB or PFIS, or the members of FNCB’s or PFIS’s board of directors, could prevent or delay the completion of the merger. Purported shareholder plaintiffs may assert legal claims related to the merger. The results of any such potential legal proceeding would be difficult to predict and such legal proceedings could delay or prevent the merger from being completed in a timely manner. Moreover, any litigation could be time consuming and expensive, and could divert attention of FNCB’s and PFIS’s respective management teams away from their companies’ regular business. Any lawsuit adversely resolved against FNCB, PFIS or members of their respective boards of directors, could have a material adverse effect on each party’s business, financial condition and results of operations. One of the conditions to the consummation of the merger is the absence of any law, order, decree or injunction (whether temporary, preliminary or permanent) or other action taken by the governmental authority of competent jurisdiction that restricts, enjoins or prohibits or makes illegal the consummation of the transactions contemplated by the merger agreement, including the merger. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a governmental authority issues an order or other directive restricting, prohibiting or making illegal the completion of the transactions contemplated by the merger agreement, including the merger, then such injunctive or other relief may prevent the merger from being completed in a timely manner or at all. Item 2 Unregistered Sales of Equity Securities FNCB did not issue any unregistered equity securities during the nine months ended September 30, 2023. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Pursuant to the share repurchase program announced by FNCB on January 25, 2023, which expires on December 31, 2023, FNCB may repurchase up to 750,000 shares of its issued and outstanding common stock. The share repurchase program is intended to comply with the provisions of the safe harbor under Rule 10b-18 of the Exchange Act. As of September 30, 2023, FNCB had not repurchased any shares under the program and the program is now terminated. Item 3 - Defaults upon Senior Securities. None. Item 4 Not (a) None. (b) None. (c) Not applicable The following exhibits are filed or furnished herewith or incorporated by reference. Inline XBRL INLINE XBRL TAXONOMY EXTENSION SCHEMA INLINE XBRL TAXONOMY EXTENSION CALCULATION LINKBASE INLINE XBRL TAXONOMY EXTENSION DEFINITION LINKBASE INLINE XBRL TAXONOMY EXTENSION LABEL LINKBASE EXHIBIT 101.PRE INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE * ** Furnished herewith SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Registrant: FNCB BANCORP, INC. Date: November By: /s/ Gerard A. Champi Gerard A. Champi Date: November By: /s/ James M. Bone, Jr. James M. Bone, Jr., CPA Executive Vice President and Chief Financial Officer Principal Financial Officer Date: November By: /s/ Stephanie A. Westington Stephanie A. Westington, CPA Senior Vice President and Principal Accounting Officer OREO properties are recorded at fair value less the estimated costs to sell at the date20172023 and at December 31, 2016.2022. FNCB discloses fair value information about financial instruments, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. The fair value of financial instruments that are not measured at fair value in the financial statements were based on the exit price notion. The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, management judgment is required to interpret data and develop fair value estimates. Accordingly, the estimates below are not necessarily indicative of the amounts FNCB could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. $ 43,810 $ 43,810 $ 112,445 $ 112,445 282,037 282,037 276,015 276,015 2,450 2,450 3,311 3,311 $ 77,071 $ 77,071 $ 41,916 $ 41,916 437,142 437,142 476,091 476,091 6,104 6,104 7,717 7,717 8,842 8,842 8,545 8,545 147 147 596 596 - - 60 60 750,627 744,660 722,860 712,263 1,193,603 1,138,396 1,110,124 1,079,266 3,203 3,203 2,757 2,757 6,599 6,599 5,957 5,957 1,160 1,160 - - 254 746 215 744 192 595 254 621 3,370 3,599 1,946 2,104 983,212 949,204 1,015,139 968,904 1,502,375 1,497,861 1,420,647 1,416,272 60,660 60,678 78,847 78,923 186,733 185,782 182,360 182,108 244 244 242 242 1,001 1,001 171 171 1,637 1,670 921 931 12.14. Earnings per Sharethethe numerator of both the basic and diluted earnings per share of common sharestock is net income available to common shareholders (which is equal to net income less dividends on preferred stock and related discount accretion).shareholders. The weighted averageweighted-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. CommonFor the three and nine months ended September 30, 2023 and 2022, common share equivalents are outstanding stock options to purchase FNCB’s commonconsisted entirely of incremental shares andof unvested restricted stock.sharestock for the three and nine months ended September 30, 2017 2023 and 2016:2022: $ 2,272 $ 2,017 $ 6,261 $ 4,785 $ 4,162 $ 5,435 $ 9,630 $ 15,526 16,757,963 16,593,811 16,711,172 16,554,391 19,776,342 19,687,766 19,724,956 19,765,814 19,708 - 17,680 1,763 18 9,281 2,834 21,041 16,777,671 16,593,811 16,728,852 16,556,154 19,776,360 19,697,047 19,727,790 19,786,855 $ 0.14 $ 0.12 $ 0.37 $ 0.29 $ 0.21 $ 0.28 $ 0.49 $ 0.79 $ 0.14 $ 0.12 $ 0.37 $ 0.29 $ 0.21 $ 0.28 $ 0.49 $ 0.79 For the three and nine months ended September 30, 2017 and 2016, common share equivalents reflected in the table above were related entirely to the incremental shares of unvested restricted stock. Stock options of 31,200 and 47,459 for the nine months ended September 30, 2017 and 2016, respectively, were excluded from common share equivalents. The exercise prices of stock options exceeded the average market price of FNCB’s common shares during the periods presented; therefore, inclusion of these common share equivalents would be anti-dilutive to the diluted earnings per common share calculation.13. 15. Other Comprehensive (Loss) Income (loss) for the three and nine months ended September 30, 2017 2023 and 2016, which are2022, comprised entirely of unrealized gains and losses on available-for-sale debt securities: $ (367 ) $ (1,338 ) $ - $ (252 ) 125 455 - 53 $ (242 ) $ (883 ) $ - $ (199 ) $ - $ (960 ) - 326 $ - $ (634 )
$ - $ 35 - (7 ) $ - $ 28 (loss), net of tax for the three and nine months ended September 30, 2017 2023 and 2016:2022: $ 1,196 $ 7,023 $ (1,560 ) $ (61 ) (844 ) (791 ) 2,553 6,927 (242 ) - (883 ) (634 ) (1,086 ) (791 ) 1,670 6,293 $ 110 $ 6,232 $ 110 $ 6,232 $ (46,236 ) $ (34,400 ) $ (48,028 ) $ 6,352 (8,958 ) (17,726 ) (6,967 ) (58,506 ) - - (199 ) 28 (8,958 ) (17,726 ) (7,166 ) (58,478 ) $ (55,194 ) $ (52,126 ) $ (55,194 ) $ (52,126 ) 2016 and Forms 10-Q for the quarters ended March 31, 2017 and June 30, 20172022 for FNCB Bancorp, Inc. and subsidiaries (collectively “FNCB”). In addition, please read this section in conjunction with the consolidated financial statements and notes to consolidated financial statements contained elsewhere herein. is Bancorp, Inc. and its subsidiaries ("FNCB") are in the business of providing customary retail and commercial banking services to individuals, businesses and local governments and municipalities through its wholly-owned subsidiary, FNCB Bank, at its 16 full-service branch offices within its primary market area, located in Northeastern Pennsylvania.ourits filings with the Securities and Exchange Commission (“SEC”), in its reports to shareholders, and in ourits 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.“plan”“plan,” “project,” “future” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause FNCB’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: government intervention in the strength of the United States economy in general and the strength of the local economies in our markets;U.S. financial system including the effects of recent legislative, tax, accounting and changes in trade, monetary, corporate taxregulatory actions and fiscal policies and laws, including interest rate policiesreforms; political instability; acts 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;world terrorism; global unrest; the ability of FNCB to compete withmanage credit risk; weakness in the economic environment, in general, and within FNCB’s market area; the occurrence of any event, change or other institutions for business;circumstances that could give rise to the compositionright of one or both of the parties to terminate the merger agreement between FNCB and concentrationsPFIS; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the merger within the expected timeframes or at all and to successfully integrate operations of FNCB’s lending riskFNCB and FNCB Bank and those of PFIS and Peoples Bank, its wholly-owned subsidiary, which may be more difficult, time consuming or costly than expected; diversion of management's attention form ongoing business operations and opportunities; effects of the adequacyannouncement, pendency or completion of our reserves to manage those risks; the valuation of FNCB’s investment securities;proposed transaction on the ability of FNCB and PFIS to payretain customers and retain and hire key personnel and maintain relationships with their vendors, and on their operating results and businesses generally; the deterioration of one or a few of the large balance commercial and/or commercial real estate loans contained in FNCB’s loan portfolio; greater risk of loan defaults and losses from concentration of loans held by FNCB, including those to insiders and related parties; if FNCB’s portfolio of loans to small and mid-sized community-based businesses increases its credit risk; if FNCB’s allowance for credit losses ("ACL") is not sufficient to absorb actual losses or if increases to the ACL were required; FNCB is subject to interest-rate risk and any changes in interest rates could negatively impact net interest income or the fair value of FNCB's financial assets; if management concludes that the decline in value of any of FNCB’s investment securities is caused by a credit-related event could result in FNCB recording an impairment loss; if FNCB’s risk management framework is ineffective in mitigating risks or losses to FNCB; if FNCB is unable to successfully compete with others for business; a loss of depositor confidence resulting from changes in either FNCB’s financial condition or in the general banking industry; if FNCB is unable to retain or grow its core deposit base; inability or insufficient dividends from its subsidiary, FNCB Bank; if FNCB loses access to wholesale funding sources; interruptions or repurchase common shares;security breaches of FNCB’s information systems; any systems failures or interruptions in information technology and telecommunications systems of third parties on which FNCB depends; security breaches; if FNCB’s information technology is unable to keep pace with growth or industry developments or if technological developments result in higher costs or less advantageous pricing; the abilityloss of management and other key personnel; dependence on the use of data and modeling in both its management’s decision-making generally and in meeting regulatory expectations in particular; additional risk arising from new lines of business, products, product enhancements or services offered by FNCB; inaccuracy of appraisals and other valuation techniques FNCB uses in evaluating and monitoring loans secured by real property and other real estate owned; unsoundness of other financial institutions; damage to FNCB’s reputation; defending litigation and other actions; dependence on the accuracy and completeness of information about customers and counterparties; risks arising from future expansion or acquisition activity; environmental risks and associated costs on its foreclosed real estate assets; any remediation ordered, or adverse actions taken, by federal and state regulators, including requiring FNCB to retain key personnel;act as a source of financial and managerial strength for the impactFNCB Bank in times of stress; costs arising from extensive government regulation, supervision and possible regulatory enforcement actions; new or changed legislation or regulation and regulatory initiatives; noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations; failure to comply with numerous "fair and responsible banking" laws; any pendingviolation of laws regarding privacy, information security and protection of personal information or threatened litigation against FNCB;another incident involving personal, confidential or proprietary information of individuals; any rulemaking changes implemented by the marketability of shares of FNCB stock and fluctuations in the value of FNCB’s share price; the effectiveness of FNCB’s system of internal controls; the ability of FNCBConsumer Financial Protection Bureau; inability to attract additional capital investment; the impact of changesand retain its highest performing employees due to potential limitations on incentive compensation contained in financial services’ lawsproposed federal agency rulemaking; any future increases in FNCB Bank’s FDIC deposit insurance premiums 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,assessments; and the success of FNCB at managing the risks involved in the foregoing and other risks and uncertainties, including those detailed in FNCB’s filings with the SEC.
Readers should carefully review the risk factors described in the Annual Report and other documents that FNCB periodically files with the SEC, including itsthe 2022 Annual Report and Quarterly Reports on Form 10-K10-Q for the yearperiods ended DecemberMarch 31, 2016.2023 and June 30, 2023.FNCB’sFNCB’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 allowanceAllowance for loan and lease losses (“ALLL”Credit Losses ("ACL"), securities’ valuation and impairment evaluation, the valuation of other real estate owned (“OREO”)securities and evaluation of securities for credit impairment, 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.ALLLACL 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.LoanCredit LossesLeaserequires consideration of a broader range of reasonable and supportable information to form credit loss estimates in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13, commonly referred to as Current Expected Credit Losses ("CECL") requires a financial asset (or a group of financial assets) to be measured at an amortized cost basis and presented at the net amount expected to be collected. The amendments in this update affect 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. Upon adoption of ASU 2016-13 on January 1, 2023, FNCB recorded an incremental decrease in the ACL through a cumulative effect adjustment to equity with subsequent adjustments charged to earnings through a provision for credit losses.ALLLACL on a quarterly basis. The ALLLACL is established through a provision for loancredit losses charged to earnings and is maintained at a level that management considers adequate to absorb estimated probablebe an estimate of the lifetime expected credit losses inherent inof 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,ACL, while recoveries of amounts previously charged off are credited to the ALLL.ACL.ALLLACL 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 peer-based historical loss experience, reasonable and supportable forecasts and qualitative factors, andas well as 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,ACL, 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.ACL. Additionally, the ALLLACL is determined, in part, by the composition and size of the loan portfolio.The ALLL consists of two components, a specific component and a general component. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted by qualitative factors. The general reserve component of the ALLL is based on pools of unimpaired loans segregated by loan segment and risk rating categories of “Pass”, “Special Mention” or “Substandard and Accruing.” Historical loss factors and various qualitative factors are applied based on the risk profile in each risk rating category to determine the appropriate reserve related to those loans. Substandard loans on nonaccrual status above the $100 thousand loan relationship threshold and all loans considered troubled debt restructurings (“TDRs”) are classified as impaired.NoteNote 4, “Loans”“Loans and Leases” of the notes to consolidated financial statements included in Item 1 hereof for additional information about the ALLL.ACL.11,13, “Fair Value Measurements” of the notes to consolidated financial statements included in Item 1 hereof for additional information about FNCB’s securities valuation techniques.On a quarterly basis,Quarterly, or more frequently if market conditions warrant, 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’swhere there has been a decline in fair value of a security below its amortized cost basis to determine whether the decline in fair value has resulted from a credit loss, or if it is less than book value,entirely the severityresult of the investment’s decline, any credit deteriorationnoncredit factors. As part of the issuer,its evaluation, management first considers whether, managementFNCB intends to sell, the security, and whetheror if it is more likely than not that FNCB willit would be required to sell, theany security in an unrealized loss position prior to recovery of its amortized cost. If either of those selling events is expected, FNCB would be required to write down the amortized cost basis. Debt investment securities deemedbasis of the security to have OTTI are written down byits fair value. If either of those selling events is not expected, FNCB must determine whether any of the impairmentdecline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit factors. 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 adverse conditions related to the estimated credit loss,security, an industry or geographic area, any adverse changes to the rating of any security by a rating agency, whether or not any issuer has failed to make contractual principal and interest payments, or if there are any indications that an issuer would not be able to make future contractual principal and interest payments. Based on the non-credit related impairment loss is recognized in other comprehensive income. FNCB did not recognize OTTI charges on investment securities for the nine months endedresults of its review as of September 30, 20172023, management concluded that changes in the fair values of the securities were consistent with movements in market interest rates and 2016 withinspreads relative to when the consolidated statementssecurities were purchased and not due to the credit quality of income.the securities or issuers. Accordingly, management determined that FNCB was not required to establish an ACL for any security in an unrealized loss position at September 30, 2023.Refer toSee Note 3, “Securities”“Securities,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about valuation of securities.Other Real Estate OwnedOREO consistsentity’sentity’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. 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 the current period earnings.FNCB uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. On September 27, 2017, the Trump Administration released a tax reform framework that includes a reduction in the U.S. corporate income tax rate to 20.0%. If corporate tax rates are 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. The House of Representatives is currently working on a draft of the bill, which is expected to be addressed by Congress later in 2017. It is too early to determine if any of the proposals on tax reform are actionable, or if acted upon, the specific tax reforms that would be implemented. Accordingly, management cannot assess the effect that any tax reform measure effectuated would have on FNCB’s operating results or financial position at the present time.2017,2023 and December 31, 2016,2022, management determined that FNCB did not have any uncertain tax positions or tax strategies and that no liability was required to be recorded.6,8, “Income Taxes”Taxes,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about income taxes.Guidance”Guidance,” of the notes to consolidated financial statements included in Item 1 hereof for information about new authoritative accounting guidance issued during the three months endedadopted by FNCB as of September 30, 2017,2023, as well as new accounting guidance issued, but not previously reported, that will be adopted by FNCB in future periods.On June 30, 2016, First National Community Bancorp, Inc.,Overviewparent companyfirst nine months of First National Community Bank, announced that following receipt2023, with four 25-basis point increases to the federal funds target rate in its February, March, May and July meetings. These increases brought the total number of required regulatory approvalsrate increases from the Pennsylvania Departmentperiod beginning March 17, 2022 through September 30, 2023 to eleven and the total basis point movement to 525. This dramatic shift in monetary policy has resulted in a rapid and significant rise ingeneral market interest rates. Additionally, FNCB has experienced an uptick in competition for deposits within its market area, reflective of Bankingindustry-wide liquidity pressures and Securities, First National Communityrate sensitivity of depositors. Higher interest rates and competition have resulted in an increase in deposit and wholesale funding costs. had completed a charter conversion from a national bank to a Pennsylvania statewill merge with and into Peoples Bank, with Peoples Bank as the surviving bank and as a resultwholly-owned subsidiary of PFIS. Under the terms of the conversion, First National Community Bank changed its legal name to FNCB Bank. BothMerger Agreement, which has been unanimously approved by the charter conversion and legal name change became effective June 30, 2016. On October 4, 2016, First National Community Bancorp, Inc., the parent companyboards of directors of both companies, shareholders of FNCB Bank,will be entitled to receive a fixed exchange ratio of 0.1460 shares of PFIS common stock for each share of the FNCB’s common stock. Completion of the merger requires, among other things, the approval of FNCB’s shareholders and customary regulatory approvals. The Merger Agreement provides certain termination rights for both PFIS and FNCB and further provides that a termination fee of $4.8 million will be payable by either PFIS or FNCB, as applicable, upon termination of the Merger Agreement under certain circumstances. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Definitive Merger Agreement filed an amendmentby FNCB as Exhibit 2.1 to its articles of incorporationthe Current Report on Form 8-K on September 27, 2023. Pending regulatory and shareholder approvals, FNCB expects the merger to change its name, effective October 17, 2016, to FNCB Bancorp, Inc. The Board of Directors of FNCB also amendedbe consummated by April 1, 2024, however, there can be no assurance that the bylaws of FNCB, effective October 17, 2016, to reflect the new name.transaction will be consummated by such date, or at all. $2.3$4.2 million, or $0.14$0.21 per basic and diluted common share, for the three-month periodthree months ended September 30, 2017, an increase 2023, a decreaseof $0.3$1.2 million, or 23.4%, compared to net income of $2.0$5.4 million, or $0.12$0.28 per basic and diluted common share, for the comparablethree months ended September 30, 2022. The decrease in the third quarter 2023 earnings reflected reductions in net interest income and non-interest income, coupled with an increase in non-interest expense. Net interest income decreased $1.8 million, or 12.4%, to $12.2 million for the three months ended September 30, 2023 from $13.9 million for the same three months of 2016. 2022, as a $5.6 million increase in interest income was more than offset by a $7.3 million increase in interest expense. Non-interest income decreased by $447 thousand, or 20.9%, to $1.7 million for the three months ended September 30, 2023 from $2.1 million for the three months ended September 30, 2022, which primarily reflected an increase in net losses recognized on equity securities, coupled with a decrease in other non-interest income. In addition, non-interest expense increased $268 thousand, or 3.0%, to $9.3 million for the three months ended September 30, 2023, from $9.0 million for the same three-month period of 2022, which was primarily due to increased salaries and benefits and the recognition of merger and acquisition expenses. These negative variances were partially offset by decreases in the provision for credit losses and income tax expense. For the three months ended September 30, 2023, FNCB recorded a credit to the provision for credit losses of $270 thousand, a positive variance of $783 thousand as compared to a provision of $513 thousand for the same three months of 2022. Income tax expense totaled $709 thousand for the three months ended September 30, 2023, a decrease of $392 thousand, or 35.6%, from $1.1 million for the same three months of 2022, which was primarily due to a reduction in pre-tax net income. 2017 was $6.32023 totaled $9.6 million, or $0.37$0.49 per basic and diluted common share, an increasea decrease of $1.5$5.9 million, or 38.0%, compared to net income of $4.8$15.5 million, or $0.29$0.79 per basic and diluted common share, for the same period of 2016. The annualized return on average equity was 9.27% and 8.87%, respectively, for the three- and nine-month periodsnine months ended September 30, 2017,2022. The decrease in year-to-date net income primarily reflected decreases in net interest income and non-interest income, coupled with an increase in non-interest expense. Net interest income decreased $4.9 million, or 12.2%, to $35.4 million for the nine months ended September 30, 2023, compared to 8.46% and 6.95%$40.3 million for the same nine months of 2022. Non-interest income totaled $4.3 million for the nine months ended September 30, 2023, a decrease of $1.3 million, or 22.8%, respectively,compared to $5.6 million for the nine months ended September 30, 2022. Similar to the reasons for the quarterly change, the decrease in non-interest income for the year-to-date period was primarily due to reductions in the fair value of equity securities. Non-interest expense increased $515 thousand, or 2.0%, to $26.3 million for the first nine months of 2023, from $25.8 million for the comparable periodsperiod of 2022. Similar to the quarterly increase, the year-to-date increase in 2016. non-interest expense was largely due to an increase in salaries and employee benefits and the recognition of merger and acquisition expenses, partially offset by a credit recorded for unfunded commitments. 2017,2023, the annualized return on average assets was 0.80%0.91% and 0.74%0.72%, respectively, compared to 1.26% and 0.73% and 0.58%, respectively,1.24% for the samerespective periods of 2016. FNCB paid dividends to holders of common stock of $0.03 per share for the three months ended September 30, 2017, totaling $0.09 per share for the year-to-date period of 2017. Dividends paid to holders of common stock were $0.02 per share2022. The annualized return on average equity was 13.39% and $0.06 per share10.38%, respectively, for the three and nine months ended September 30, 2016, respectively. On October 25, 2017,2023, and 16.95% and 15.04%, respectively, for the boardcomparable periods of directors of2022. FNCB declared a dividendand paid dividends to holders of $0.04common stock of $0.090 per share for the fourth quarter of 2017, an increase of 33.3% compared the third quarter of 2017 and the fourth quarter of 2016. The fourth quarter dividend is payable on December 15, 2017 to shareholders of record as of December 1, 2017.The $0.3 million, or 12.6%, increase in earnings for the third quarter of 2017, as2023 and $0.270 per share for the nine months ended September 30, 2023, compared to $0.090 and $0.240 per share, respectively, for the same quarterquarter-to-date and year-to-date periods of 2016,2022.dueattributable to increasesa $7.2 million, or 14.9%, increase in the accumulated other comprehensive loss, coupled with year-to-date dividends declared of $5.3 million. Year-to-date net income of $9.6 million and cumulative effect adjustment related to the adoption of ASU 2016-13 of $1.1 million partially offset the decreases to capital. FNCB Bank was considered well capitalized with total risk-based capital and Tier 1 leverage ratios were 13.21% and 9.11% at September 30, 2023, respectively.of $0.6 million and $0.3 million, respectively, coupled with a decrease of $0.2 million inrun rates, as well as controlling non-interest expense. Partially offsetting these positive fluctuations was a provision for loanFNCB continues to expand its comprehensive digital strategy in response to evolving customer demands and lease losses of $0.5 million as compared to a credit for loancreate operational and lease losses of $0.2 million in 2016, and an increase of $0.1 million in income tax expense.Year-to-date net income increased $1.5 million, or 30.8%, comparing the nine months ended September 30, 2017 and 2016. The improvement in earnings was due primarily to an increase in net interest income of $1.4 million, or 6.2%, coupled with a decrease in the provision for loan and lease losses of $0.4 million, an increase in non-interest income of $0.5 million and a decrease in non-interest expense of $0.1 million.delivery channel efficiencies. These improvements were partially offset by an increase in income tax expense of $0.9 million.Total assets decreased $38.5 million, or 3.2%, to $1.157 billion at September 30, 2017 from $1.196 billion at December 31, 2016. The change in total assets primarily resulted from a $68.6 million, or 61.0%, reduction in cash and cash equivalents, which was driven by a $31.9 million reduction in total deposits, coupled with the repayment of borrowed funds of $18.2 million. The decrease in total deposits was primarily attributable to the anticipated exit of short-term funds in the first quarter of 2017enhancements include initiatives related to the saleexisting online banking platforms, continued utilization of a municipal utility in December 2016. The remainder of the reduction in cash and cash equivalents resulted from reinvestment into interest-earning assets, as net loans increased by $27.8 million, or 3.8%, and available-for-sale securities increased $6.0 million, or 2.2%.Total shareholders’ equity increased $7.1 million, or 7.9%, to $97.5 million at September 30, 2017 from $90.4 million at December 31, 2016. The capital improvement resulted primarily from net income for the first nine months of 2017 of $6.3 million, coupled with a $1.7 million increase in accumulated other comprehensive income, which resulted from appreciation in the fair value of available-for-sale securities net of the tax impact of the appreciation.With a focus on diversity, furthering FNCB’s strategic goals and strengthening corporate governance, on September 27, 2017, the board of directors of FNCB and the Bank elected three new independent members to the boards of both entities and approved the formation of a community advisory board. The addition of the new members extends both boards to 12 directors. The advisory board will consist of members from Northeastern Pennsylvania and the Lehigh Valley who will advise, support and serve as liaisons for the Bank in developing and furthering relationships with businesses and the community in our market area. The board of directors expects to fill advisory board positions in 2018. In addition to expanding the board and approving the formation of an advisory board, on September 27, 2017, the Board of Directors approved revisions to its Corporate Governance Guidelines to set a retirement age for FNCB’s and the Bank’s directors and executive officers. According to the approved revisions, no person can be nominated to serve as a Director after he or she has passed his or her 80thbirthday. In the event that a director turns the age of 80 during his or her term as a Director, he or she may serve the remaining time of his or her term until his or her successor is duly elected and qualified or until the earlier of his or her death, resignation or removal. In addition, FNCB’s and the Bank’s executive officers are now subject to a mandatory retirement age of 75. Such retirement age may be waived for the President and Chief Executive Officer for strategic planning purposes in the sole discretion of the Board of Directors of FNCB and the Bank.Throughout the last quarter of 2017, and in preparation for 2018, management continues to be focused on developing strategies aimed at improving long-term financial performance by improving efficiency, increasing net interest income through commercial and retail loan growth initiatives, and developing additional sources of non-interest income. 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. Additionally, in orderorigination platforms and utilizing artificial intelligence and robotics to facilitate loan growth initiatives, on March 7, 2017,streamline workflows. FNCB opened a lending center immediately adjacentcontinues to its main office in Dunmore, Lackawanna County, Pennsylvania, which houses part of its commercial and retail lending units.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. As a result of these evaluations, on May 1, 2017, FNCB announced that the Bank will implement a comprehensive branch network improvement program that will focus on building and strengthening better positioningFNCB's core customer base, including enhancing wallet share, and expanding its market coverage by developing new state-of-the-art customer facilities, as well as relocating and consolidating select locations. In accordance with the branch network improvement program, on June 30, 2017, FNCB consolidated its branch office located at 1127 Texas Palmyra Highway, Honesdale, Wayne County, Pennsylvania with its branch located at 1001 Main Street, Honesdale, Pennsylvania.bank-wide staff development programs.As part of this network improvement program, FNCB announced its intention to relocate three branches located in Luzerne County, Pennsylvania to a new location. The three branches that will be relocated are: 1) a branch located at 734 San Souci Parkway, Hanover Township, Pennsylvania; 2) a branch located at 27 North River Street, Plains, Pennsylvania; and 3) a branch located at 3 Old Boston Road, Pittston, Pennsylvania. These three branches will be relocated into a brand-new facility to be built in the Richland 315 development located at 1150 Route 315, Wilkes-Barre (Plains Township), Luzerne County, Pennsylvania. FNCB currently leases the three branches, as well as the aforementioned Honesdale branch, that was consolidated, and will lease the future Luzerne County facility. FNCB does not expect to incur any significant disposal costs on either the Wayne County or Luzerne County branch consolidations. The construction of this project is expected to begin in the fourth quarter of 2017 and be completed in the second quarter of 2018, at which time the consolidation will occur. The three existing branches will continue to operate as full-service branches until that time.Following continued analysis of FNCB’s locations and facilities, on September 27, 2017, the Board of Directors approved the purchase of the Bank’s corporate center located at 200 South Blakely Street, Dunmore, Pennsylvania, for $2.15 million. FNCB has been leasing this property since 1994. The purchase, which is scheduled to be finalized in January 2018, will be funded by cash generated by operations and is anticipated to reduce occupancy expenses in excess of $100,000 annually.The program also calls for the continued evaluation of FNCB’s delivery systems. In the second quarter of 2017, FNCB commenced a project to upgrade its entire automated teller machine network. In addition, management plans to evaluate the development of new state-of-the-art facilities on properties already owned by FNCB located in Taylor Borough, Lackawanna County, Pennsylvania and in Dunmore, Lackawanna County, Pennsylvania.isdefined as the difference between (i) interest income,, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits and borrowed funds. Net interest income representsfunds, is the largest componentprimary source of FNCB’s operating income and, asearnings for commercial banks. As such, it is the primary determinant of profitability.profitability for FNCB. Net interest income is impacted by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market rates and the level of non-performing assets. Interest income is shownpresented on a fully tax-equivalent basis and is calculated by adjusting tax-free interest using a marginalthe statutory corporate tax rate of 34.0%21.0% in order to equate the yield to that of taxable interest rates.2023 and 2022.SinceIn response to the economic uncertainty from the global COVID-19 pandemic, the FOMC lowered the federal funds target rate 150 basis points in two emergency actions in March 2020. As a result, the target range for federal funds fell from 1.50%-1.75% at December 31, 2019 to 0.00%-0.25% at March 31, 2020, and remained at these historically low levels through March 15, 2022. Lingering effects from the COVID-19 pandemic, supply chain constraints and effects from the war in Ukraine, among others, resulted in rapid rise in price inflation. As a result, the FOMC, in an effort to lower inflation to its 2.0% objective, began tightening economic policy in 2022. Specifically, the FOMC increased the target range for the federal funds rate a total of 525 basis points through September 30, 2023, which included an additional four 25-basis point increases during the first 25-basis point increasenine months of 2023, on February 1, 2023, March 2, 2023, May 3, 2023, and July 26, 2023. The increases in the federal funds target rate on December 16, 2015, the Federal Open Market Committee (“FOMC”) increased the target rate a total of 75 basis points in three 25-basis point actions on December 14, 2016, March 15, 2017 and June 14, 2017. These actions resulted in a corresponding increasestotal 525-basis point increase in the national prime rate. At September 30, 2017, the national prime rate, which was 4.25%, 75 basis points higher than 3.50%8.50% at September 30, 2016. FNCB experienced an2023. In addition to these actions, the FOMC has indicated additional rate increases may be necessary for the remainder of 2023 in order to achieve its objectives. This dramatic shift in monetary policy has resulted in a rapid rise ingeneral market interest rates. Competition for deposits within FNCB's market area has intensified, reflecting industry-wide liquidity pressures and rate sensitivity of depositors. Higher interest rates, coupled with the increased competition, has resulted in significant increases in deposit and wholesale funding costs that have surpassed increases in earning assets yields, which have resulted in net interest margin and rate spread compression. Management has noted that competition for deposits within FNCB's market area started to increase in loan yieldsthe second half of 2022, which has continued through the first nine months of 2023. Management recognizes that additional tightening actions by the FOMC in 2023, could result in further contraction of FNCB's tax-equivalent net interest margin and rate spread. Additionally, the recent onset of conflict in the third quarterMiddle East, as well as increasing tension and year-to-date periodunrest worldwide, could drive further inflation and place additional strain on economic conditions in the United States, the banking industry and global markets.2017depositors mentioned above, FNCB has employed various promotional deposit products including certificate of deposit and money market products having promotional rates. Additionally, FNCB has also become more reliant on wholesale funding, including brokered deposits and borrowing arrangements with the FHLB of Pittsburgh and the Federal Reserve Board ("FRB") as compareddeposit gathering has been pressured by industry-wide liquidity constraints. Management anticipates that FNCB's cost of funds may continue to increase as a result of further tightening by the same periodsFOMC and increased competition within FNCB's market area. Additionally, the replacement rates of 2016, as variable-existing certificates of deposit, other deposit products and adjustable-rate loanswholesale funding instruments may be higher than current rates, which would negatively impact FNCB's cost of funds and result in further net interest margin and spread contraction. Further contraction in margin and spread could have begunan unfavorable impact on profitability and future net interest levels. Management monitors FNCB's interest rate risk and sensitivity to reprice upward. The increasechanges in market interest rates has also ledthrough the Asset Liability Committee ("ALCO") and is committed to notable increasesprudent and proactive balance sheet management with a focus on controlling funding costs in relation to funding needs and yields on earning assets in order to mitigate any potential unfavorable impact to FNCB's earnings and profitability. specifically FHLB borrowings. Deposit costs have also begun to increase, but to a lesser extent.increased $0.6decreased $1.8 million, or 7.9%12.4%, to $8.5$12.5 million for the three months ended September 30, 20172023 from $7.9$14.3 million for the comparable period of 2016. Tax-equivalent2022, as interest incomeexpense increased $0.8by a greater magnitude than tax-equivalent interest income. Interest expense increased $7.3 million, or 9.2%396.2%, to $9.7$9.1 million for the three months ended September 30, 2017third quarter of 2023 from $8.9$1.8 million for the same periodquarter of 2016. Partially offsetting the increase in2022, while tax-equivalent interest income was an increase in interest expense of $0.2increased $5.5 million, or 18.0%1.06%, which largely reflected an increase in interest expense paid on deposits, partially offset by a reduction in interest on borrowed funds. Tax-equivalentto $21.6 million from $16.1 million, comparing the third quarters of 2023 and 2022, respectively. The tax-equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-earning assets. FNCB’s tax-equivalent net interest margin improved 13contracted 58 basis points to 3.27%2.85% for the third quarter of 20172023 from 3.14%3.43% for the same quarter of 2016.2022. Additionally, the tax-equivalent margin for the third quarter of 2017 was a 6-basis point improvement compared to 3.21% for the second quarter of 2017. Raterate 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 3.18% declined 101 basis points to 2.27%for the three months ended September 30, 2017,2023 from 3.28% for the same three months of 2022. 12deposit specials in response to rising market rates and increased competition. Additionally, liquidity pressures and competition for deposits caused FNCB to rely more heavily on wholesale funding. FNCB experienced a 207-basis point increase in the cost of funds to 2.66% for the three months ended September 30, 2023, from 0.59% for the same three months of 2022, which resulted in a corresponding increase in interest expense of $6.4 million. The average rate paid for interest-bearing deposits increased 187 basis points compared to 3.06%2.23% for the third quarter of 2023 from 0.36% for the same period of 2016. FNCB’s tax-equivalent net2022. Costs for all major deposit categories increased and resulted in a combined corresponding increase to interest margin and spreadexpense of $5.3 million. Specifically, the average rate paid on interest bearing demand deposits increased 158 basis points to 1.98% for the ninethird quarter of 2023 from 0.40% for the same quarter of 2022, which resulted in a corresponding increase to interest expense of $2.7 million. Comparing the third quarters of 2023 and 2022, the average rates paid for time deposits and savings deposits, increased 312 basis points and 15 basis points, respectively, resulting in corresponding increases to interest expense of $2.5 million and $49 thousand, respectively. Additionally, FOMC actions resulted in an increase in wholesale borrowing costs. Comparing the three months ended September 30, 2017 each improved by 52023 and 2022, the average rate paid for borrowed fund increased 238 basis points to 4.94% from 2.56%, respectively, which caused a corresponding increase to interest expense of $1.1 million. Average interest-bearing liabilities increased $122.8 million, or 9.8%, to $1.372 billion for the three months ended September 30, 2023, from $1.249 billion for the same three months of 2022, which resulted in a corresponding increase to interest expense of $918 thousand. Specifically, the average balance of borrowed funds increased $85.3 million, or 65.4%, to $215.8 million for the third quarter of 2023 from $130.5 million for the same quarter of 2022. The increase in average volume of borrowed funds contributed $756 thousand, or 82.3%, of the total increase in interest expense due to volume changes. Additionally, average interest-bearing deposits increased $37.4 million, or 3.3%, to $1.156 billion from $1.119 billion comparing the third quarters of 2023 and 2022, respectively. The increase in average interest-bearing deposits resulted in a corresponding increase to interest expense of $162 thousand. As mentioned earlier, FNCB experienced deposit migration from non-maturity deposits into time deposits. Average time deposits increased $181.4 million, or 110.0%, to $346.3 million for the three months ended September 30, 2023, from $164.9 million for the same three months of 2022, as changing customer deposit preferences due to the economic and rate environment continued to result in deposit migration. Additionally, FNCB utilized brokered deposits for various ALCO strategies to control interest sensitivity and for liquidity purposes. Brokered deposits averaged $127.2 million for the three months ended September 30, 2023, an increase of $94.7 million from $32.5 million for the same three months of 2022. The increase in average time deposit balances, including retail and brokered deposits, resulted in additional interest expense of $318 thousand. Partially offsetting the increase in interest expense due to higher time deposit balances were reductions in average interest-bearing demand deposits and average savings deposits. Average interest-bearing demand deposits decreased $131.5 million, or 16.3%, to $676.0 million for the third quarter of 2023 compared to $807.5 million for the same periodquarter of 2016.2022, while average savings deposits decreased $12.5 million, or 8.5%, to $134.0 million from $146.5 million comparing the third quarters of 2023 and 2022, respectively.$0.8$5.5 million, or 34.3%, increase in tax-equivalent interest income comparing the third quarters of 2017three months ended September 30, 2023 and 2016 was due primarily to2022 largely reflected an improvementincrease in the tax-equivalent yield on average earning assets, of 19coupled with growth in average earning assets. The tax-equivalent yield on average earning assets increased 106 basis points to 4.93% for the third quarter of 2023 from 3.87% for the same quarter of 2022, which contributed $580 thousandresulted in a corresponding $4.4 million increase to the increase in tax-equivalent interest income. Specifically, the tax-equivalent yieldsyield on the loan portfolio increased 125 basis points to 5.74% from 4.49% comparing the third quarters of 2023 and 2022. Additionally, the tax-equivalent yield on the investment portfolio increased 38 basis points to 3.04% for the third quarter of 2023 from 2.66% for the same quarter of 2022, while the yield on interest-bearing balances in other banks increased 351 basis points to 5.15% from 1.64% comparing the three months ended September 30, 2023 and 2022, respectively. The yield increases for loans, investment securities,investments and interest-bearing deposits within other banks increased by 22 basis points, 21 basis points, and 78 basis points, respectively, contributing $414 thousand, $151 thousand, and $15 thousand, respectively, to the improvementresulted in corresponding increases in tax-equivalent interest income.income of $3.7 million, $512 thousand, and $239 thousand, respectively. Additionally, thetotal average balance of earning assets increased by $36.8$92.7 million, or 5.6%, to $1.752 billion for the three months ended September 30, 2023, from $1.659 billion for the same three months of 2022, which resulted in a corresponding increase in tax-equivalent interest income of $240 thousand.$1.1 million. Specifically, average total loans and leases increased $105.1 million, or 9.5%, to $1.208 billion for the third quarter of 2023 from $1.103 billion for the same quarter of 2022, which largely reflected strong organic loan demand concentrated in commercial equipment financing. The increase was concentrated in the average balanceloan and lease balances resulted in a corresponding increase to tax-equivalent interest income of investment securities, which grew $29.6$1.3 million or 11.3%, to $290.9 million forcomparing the three months ended September 30, 2017 from $261.32023, and 2022. Meanwhile, total securities averaged $525.3 million for the same three months of 2016, as the investment portfolio played a more prominent role in FNCB’s mix of earning assets. In addition, average loans grew $6.2 million, or 0.8%, comparing the third quarters of 2017 and 2016, contributing $45 thousand to the increase in tax-equivalent interest income.Partially offsetting the improvement in tax-equivalent interest income was a $195 thousand increase in interest expense comparing the third quarters of 2017 and 2016, which largely reflected a 7-basis point increase in the cost of funds to 0.59% for the three months ended September 30, 2017 from 0.52% for the comparable period of 2016. Partially offsetting the higher funding costs was a reduction in the average balance of borrowed funds. Interest expense paid on deposits for the third quarter of 2017 increased $239 thousand over the comparable quarter of 2016, which was driven by a 10-basis point increase in the average rate paid on deposits, resulting in an increase in interest expense of $223 thousand. When comparing the third quarter of 2017 with that of 2016, the increase in rates paid on interest-bearing demand deposits, savings deposits, and time deposits increased by 16 basis points, 3 basis points, and 4 basis points, respectively. The increase in rates was coupled with increases in the average balance of interest-bearing deposits of $55.2 million, or 7.5%, which also contributed to the increase in interest expense by $16 thousand. Partly offsetting the increase in interest expense paid on interest-bearing deposits was2023, a decrease of $44 thousand in interest paid on borrowed funds, driven entirely by a reduction in the average balance of $30.6$26.7 million, or 29.5%4.8%, to $73.2 million for the three months ended September 30, 2017 from $103.8$552.0 million for the same three monthsquarter of 2016. The2022, which caused a corresponding decrease in average borrowed funds led to a decrease intax-equivalent interest expenseincome of $128 thousand, which was partly offset by a 37-basis point increase in the average rate paid on borrowed funds, resulting in an increase in interest expense of $84$190 thousand.For the nine months ended September 30, 2017,On a year-to-date basis, tax equivalent net interest income on a tax-equivalent basis increased $1.4decreased $4.9 million, or 5.9%12.0%, to $24.8 million from $23.4 million for the comparable period in 2016. Comparing the year-to-date periods of 2017 and 2016, tax-equivalent interest income increased $1.7 million, or 6.4%, while interest expense increased $0.3 million, or 10.8%. The increase in tax-equivalent interest income primarily reflected an increase in the tax-equivalent yield on earning assets, coupled with a strong growth in average earning assets. The tax-equivalent yield on earning assets, impacted by FOMC actions, improved 8 basis points to 3.63% for the nine months ended September 30, 2017 from 3.55% for the same period of 2016. The increase resulted from increases in the yields on loans, investment securities, and interest-bearing deposits of 13 basis points, 16 basis points, and 53 basis points, respectively, contributing $789 thousand, $331 thousand, and $32 thousand, respectively, to the improvement in tax-equivalent interest income. The average balance of interest-earning assets increased $41.1 million, or 4.1%, comparing the year-to-date period of 2017 with that of 2016, which resulted in a $555 thousand increase in tax-equivalent interest income. The average balances of investment securities grew $26.8 million, or 10.2%, to $289.1$36.2 million for the nine months ended September 30, 20172023, from $262.3$41.1 million for the samecomparable period of 2016, which resulted2022. The decrease in additionaltax-equivalent net interest income for the year-to-date period was largely due to a $21.6 million, or 745.2%, increase in interest expense, to $24.5 million, from $2.9 million for 2022, partially offset by an increase in tax equivalent interest income of $535 thousand. In addition the average balance of interest-bearing deposits in other banks increased $15.6 million and resulted in an increase in interest income of $100 thousand comparing the nine-month periods ended September 30, 2017 and 2016. Slightly offsetting these volume increases was an $80 thousand decrease in interest income due to a $1.3$16.7 million, or 0.2%37.8%, reduction in the average balance of loans to $728.4$60.7 million for the nine months ended September 30, 20172023, from $729.7 million for the same nine-month period of 2016.The increase in interest expense of $0.3 million also reflected the FOMC actions as both deposit and borrowing costs have risen in response. The cost of deposits increased 5 basis points from 0.37% for the nine months ended September 30, 2016, to 0.42% for the same period of 2017. In addition, the cost of borrowed funds increased 38 basis points from 1.35% for the year-to-date period of 2016 to 1.73% for the comparable period of 2017. The increases in rates paid on deposits and borrowed funds led to increases in interest expense of $443 thousand and $265 thousand, respectively. These rate increases were partially offset by a decline in the average balance of borrowed funds of $36.9 million, or 33.1%, to $74.6$44.0 million for the nine months ended September 30, 20172022. Similar to the quarterly period, the $21.6 million, or 745.2%, increase in year-to-date interest expense was primarily due to higher funding costs, coupled with an increase in average interest-bearing liabilities, specifically borrowed funds. FNCB's cost of funds increased 210 basis points to 2.42% for the nine months ended September 30, 2023 from $111.50.32% for the same period of 2022, which caused a corresponding increase to interest expense of $14.8 million. The cost of deposits increased 178 basis points to 1.98% from 0.20% comparing the nine months ended September 30, 2023 and 2022, respectively, which resulted in a corresponding increase to interest expense of $14.8 million. Additionally, FNCB experienced a 322-basis point increase in the cost of borrowed funds to 4.90% for the first nine months of 2023 compared to 1.68% for the same period of 2022, which resulted in a corresponding increase to interest expense of $4.0 million. Average interest-bearing liabilities increased $141.3 million, or 11.7%, to $1.350 billion for the nine months ended September 30, 2023, from $1.208 billion for the same nine months of 2022, resulting in a corresponding increase to interest expense of $2.8 million. The increase due to volume was almost entirely due to a $107.8 million, or 110.6%, increase in average borrowed funds to $205.4 million for the nine months ended September 30, 2016,2023, from $97.6 million for the comparable period of 2022, as FNCB was more reliant on wholesale funding. Comparing the year-to-date periods of 2023 and 2022, average interest-bearing deposits increased $33.5 million, or 3.0%, to $1.144 billion from $1.111 billion, respectively, which contributed $482 thousand to the overall increase in interest expense due to volume changes.reduction incorresponding increase of $12.8 million to tax-equivalent interest expense paidincome. The tax-equivalent yield on loans increased 119 basis points, while the tax-equivalent yield on investments increased 51 basis points comparing the year-to-date periods of $431 thousand. The aforementioned factors2023 and 2022, which resulted in a moderate increasecorresponding increases in the costtax-equivalent interest income of interest-bearing liabilities of 3 basis points$10.2 million and $2.1 million, respectively. Regarding earning-asset volumes, total average earning assets increased $114.3 million, or 7.1%, to 0.53% from 0.50% when comparing$1.729 billion for the nine months ended September 30, 20172023, from $1.615 billion for the same period of 2022, which resulted in a corresponding increase in tax-equivalent interest income of $3.9 million. Similar to the quarterly period, this was primarily due to an increase in average total loans and 2016, respectively.leases which increased $117.2 million, or 11.1%, to $1.174 billion for the nine months ended September 30, 2023, from $1.057 billion for the same comparable period of 2022. This increase resulted in a corresponding increase in tax-equivalent interest income of $4.1 million.Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following tables present certain information about FNCB’s consolidated statementsthe average balances of financial conditionassets and consolidated statements ofliabilities, corresponding interest income and expense and resulting average yields or rates paid for the three-three and nine-month periodsnine months ended September 30, 20172023 and 2016, and reflect the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.2022. Average balances are derived from average daily balances. The loan and lease yields include amortization of deferred origination fees and costs which are considered adjustments to yields. $ 700,729 $ 7,266 4.15 % $ 685,038 $ 6,751 3.94 % 38,109 470 4.93 % 47,620 526 4.42 % $ 1,152,611 $ 16,768 5.82 % $ 1,045,474 $ 11,870 4.54 % 55,100 577 4.19 % 57,099 506 3.54 % 738,838 7,736 4.19 % 732,658 7,277 3.97 % 1,207,711 17,345 5.74 % 1,102,573 12,376 4.49 % 290,348 1,998 2.75 % 260,431 1,650 2.53 % 430,977 3,311 3.07 % 438,339 2,796 2.55 % 600 11 7.33 % 905 14 6.19 % 94,276 682 2.89 % 113,629 875 3.08 % 290,948 2,009 2.76 % 261,336 1,664 2.55 % 525,253 3,993 3.04 % 551,968 3,671 2.66 % 7,499 24 1.28 % 6,448 8 0.50 % 18,874 243 5.15 % 4,634 19 1.64 % 1,037,285 9,769 3.77 % 1,000,442 8,949 3.58 % 1,751,838 21,581 4.93 % 1,659,175 16,066 3.87 % 101,181 107,762 66,986 65,524 (8,578 ) (8,752 ) (13,080 ) (13,677 ) $ 1,129,888 $ 1,099,452 $ 1,805,744 $ 1,711,022 $ 489,950 483 0.39 % $ 424,088 244 0.23 % $ 676,034 3,342 1.98 % $ 807,522 802 0.40 % 102,281 35 0.14 % 99,273 27 0.11 % 134,050 97 0.29 % 146,513 53 0.14 % 200,418 425 0.85 % 214,070 433 0.81 % 346,261 3,007 3.47 % 164,874 146 0.35 % 792,649 943 0.48 % 737,431 704 0.38 % 1,156,345 6,446 2.23 % 1,118,909 1,001 0.36 % 73,168 337 1.84 % 103,821 381 1.47 % 215,801 2,664 4.94 % 130,481 835 2.56 % 865,817 1,280 0.59 % 841,252 1,085 0.52 % 1,372,146 9,110 2.66 % 1,249,390 1,836 0.59 % 156,483 152,319 287,846 318,656 10,325 11,006 22,444 15,742 97,263 94,875 123,308 127,234 $ 1,129,888 $ 1,099,452 $ 1,805,744 $ 1,711,022 8,489 3.18 % 7,864 3.06 % 12,471 2.27 % 14,230 3.28 % (164 ) (184 ) (264 ) (290 ) $ 8,325 $ 7,680 $ 12,207 $ 13,940 3.27 % 3.14 % 2.85 % 3.43 % tax-equivalenttax equivalent basis using a 34% rate for 2017 and 2016.21% rate.NonaccrualNon-accrual loans are included in loans within earning assetsassets.Loan fees included in interestInterest income are not significanton loans and leases include the amortization of loan costs of $331 thousand and $195 thousand for the three months ended September 30, 2023 and 2022, respectively.interest bearinginterest-bearing liabilities and is presented on a tax equivalent basis.(7)income as a percentage of total average interest earning assets. $ 687,744 $ 20,783 4.03 % $ 681,638 $ 19,913 3.90 % 40,686 1,462 4.79 % 48,060 1,623 4.50 % $ 1,119,522 $ 46,324 5.52 % $ 1,005,006 $ 32,368 4.29 % 54,775 1,668 4.05 % 52,116 1,397 3.57 % 728,430 22,245 4.07 % 729,698 21,536 3.94 % 1,174,297 47,992 5.45 % 1,057,122 33,765 4.26 % 287,639 5,791 2.68 % 261,271 4,944 2.52 % 439,428 9,948 3.02 % 439,765 7,778 2.36 % 1,418 64 5.98 % 1,033 45 5.81 % 96,338 2,114 2.93 % 108,926 2,482 3.04 % 289,057 5,855 2.70 % 262,304 4,989 2.54 % 535,766 12,062 3.00 % 548,691 10,260 2.49 % 19,781 146 0.98 % 4,189 14 0.45 % 18,861 672 4.75 % 8,815 34 0.51 % 1,037,268 28,246 3.63 % 996,191 26,539 3.55 % 1,728,924 60,726 4.68 % 1,614,628 44,059 3.64 % 100,422 108,140 67,407 75,066 (8,526 ) (8,737 ) (12,967 ) (13,316 ) $ 1,129,164 $ 1,095,594 $ 1,783,364 $ 1,676,378 $ 492,367 1,248 0.34 % $ 421,040 673 0.21 % $ 691,179 9,555 1.84 % $ 810,220 1,212 0.20 % 102,447 102 0.13 % 96,340 62 0.09 % 138,088 271 0.26 % 143,649 99 0.09 % 199,897 1,163 0.78 % 212,100 1,274 0.80 % 315,082 7,142 3.02 % 157,000 360 0.31 % 794,711 2,513 0.42 % 729,480 2,009 0.37 % 1,144,349 16,968 1.98 % 1,110,869 1,671 0.20 % 74,588 966 1.73 % 111,451 1,132 1.35 % 205,415 7,543 4.90 % 97,558 1,229 1.68 % 869,299 3,479 0.53 % 840,931 3,141 0.50 % 1,349,764 24,511 2.42 % 1,208,427 2,900 0.32 % 154,828 148,659 286,624 315,699 10,665 14,012 22,980 14,244 94,372 91,992 123,996 138,008 $ 1,129,164 $ 1,095,594 $ 1,783,364 $ 1,676,378 24,767 3.10 % 23,398 3.05 % 36,215 2.26 % 41,159 3.32 % (519 ) (567 ) (794 ) (814 ) $ 24,248 $ 22,831 $ 35,421 $ 40,345 3.18 % 3.13 % 2.79 % 3.40 % tax-equivalenttax equivalent basis using a 34% rate for 2017 and 2016.21% rate.NonaccrualNon-accrual loans are included in loans within earning assetsassets.LoanInterest income on loans and leases include the amortization of loan costs of $918 thousand for the nine months ended September 30, 2023 and loan fees included in interest income are not significantof $324 thousand for the nine months ended September 2022.interest bearinginterest-bearing liabilities and is presented on a tax equivalent basis.statutorycorporate federal income tax rate of 34%21%. $ 157 $ 358 $ 515 $ 180 $ 690 $ 870 (112 ) 56 (56 ) (260 ) 99 (161 ) $ 1,308 $ 3,590 $ 4,898 $ 3,988 $ 9,968 $ 13,956 (18 ) 89 71 74 197 271 45 414 459 (80 ) 789 709 1,290 3,679 4,969 4,062 10,165 14,227 199 149 348 518 329 847 (48 ) 563 515 (6 ) 2,176 2,170 (5 ) 2 (3 ) 17 2 19 (142 ) (51 ) (193 ) (278 ) (90 ) (368 ) 194 151 345 535 331 866 (190 ) 512 322 (284 ) 2,086 1,802 1 15 16 100 32 132 (15 ) 239 224 78 560 638 240 580 820 555 1,152 1,707 1,085 4,430 5,515 3,856 12,811 16,667 43 196 239 129 446 575 (151 ) 2,691 2,540 (204 ) 8,547 8,343 1 7 8 4 36 40 (5 ) 49 44 (4 ) 176 172 (28 ) 20 (8 ) (72 ) (39 ) (111 ) 318 2,543 2,861 690 6,092 6,782 16 223 239 61 443 504 162 5,283 5,445 482 14,815 15,297 (128 ) 84 (44 ) (431 ) 265 (166 ) 756 1,073 1,829 2,311 4,003 6,314 (112 ) 307 195 (370 ) 708 338 918 6,356 7,274 2,793 18,818 21,611 $ 352 $ 273 $ 625 $ 925 $ 444 $ 1,369 $ 167 $ (1,926 ) $ (1,759 ) $ 1,063 $ (6,007 ) $ (4,944 ) LoanCredit Losses - Loans and Lease LossesLeasesALLLACL 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 leasecredit losses and the ALLLACL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ALLL. The provision for loanACL. Management will continue to closely monitor FNCB's asset quality 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. Aadjust credit to loan and lease losses reflects the reversal of amounts previously charged to the ALLL.loan and leasecredit losses of $543$270 thousand for the three-month period ended September 30, 2023 compared to a $513 thousand provision for credit losses for the three months ended September 30, 2017, compared to a2022. The provision for credit losses totaled $1.5 million for loan and lease lossesthe nine months ended September 30, 2023, an increase of $234$170 thousand, from $1.3 million for the same period of 2016. The provision recorded for the third quarter of 2017 resulted primarily from strong loan growth, coupled with net charge-offs of $150 thousand, during the period. For the year-to-date periods ended September 30, 2017 and 2016, FNCB recorded provision expenses of $486 thousand and $858 thousand, respectively. The provision expense for the first nine months of 2017 reflected2022. The increase in credit provisioning for the year-to-date period was primarily attributable to an increase in loan growth, coupled with net charge-offs recorded of $43 thousand.volumes.Non-interestFor the three months ended September 30, 2023, non-interest income totaled $1.7decreased $447 thousand, or 20.9%, to $1.7 million from $2.1 million for the three months ended September 30, 2017, an increase of $0.3 million, or 24.2%, from $1.4 million earned during the comparable period in 2016. When comparing the third quarters of 2017 and 2016, the increase in non-interest income primarily reflected increases in net gains2022. The revenue decrease was largely due to unrealized losses recognized on the sale ofequity securities, of $367 thousand, other income of $28 thousand, and loan-related fees of $11 thousand. Those increases were partially offset bycoupled with decreases in net gains on the sale of mortgage loans held for sale and other real estate ownednon-interest income. Stock volatility in the financial sector continued into the third quarter of $322023. As result, FNCB recognized net losses on equity securities of $233 thousand netfor the three months ended September 30, 2023, a $319 thousand increase compared to $86 thousand in gains on equity securities recognized for the same quarter of 2022. FNCB's holdings of equity securities are comprised primarily of common stock of publicly traded bank holding companies. Rising interest rates and several bank failures in 2023 has caused volatility in the financial services industry and has negatively impacted equity prices within this sector. Net gains on the sale of SBA guaranteedmortgage loans held for sale in the third quarter of $282023 totaled $1 thousand, and deposit service chargescompared to net gains of $11 thousand.$91 thousand for the same quarter of 2022, reflecting a reduction in mortgage activity due to the steep increase in mortgage rates. Other non-interest income was $137 thousand for the third quarter of 2023, a decrease of $158 thousand, or 53.6%, compared to $295 thousand for the same quarter of 2022. This decrease largely reflected a decrease in loan referral fees, specifically commissions received on loan swap transactions. These decreases in non-interest income were partially offset by an increase in wealth management services revenue. Wealth management services revenue generated from 1st Investment Services increased $128 thousand, or 117.4%, to $237 thousand for the three months ended September 30, 2023, compared to $109 thousand for the comparable period of 2022. 2017,2023, non-interest income totaled $5.3decreased $1.3 million, or 22.8%, to $4.3 million from $5.6 million for the nine months ended September 30, 2022. Similar to the quarterly period, the reduction in non-interest income resulted primarily from an unfavorable change in market value of equity securities, partially offset by a net gain realized on the sale of available-for-sale debt securities and an increase in revenue generated for wealth management services. FNCB recorded a net loss on equity securities of $1.8 million for the nine months ended September 30, 2023, an increase of $0.5$1.7 million, compared to a net loss on equity securities of $121 thousand recorded for the same period of 2022. Partially offsetting the increase in net loss on equity securities was a net gain realized on the sale of available-for-sale debt securities of $252 thousand for the nine months ended September 30, 2023, a favorable variance of $287 thousand compared to a net loss of $35 thousand realized on the sales of available-for-sale debt securities for the same period of 2022. Wealth management services revenue generated from 1st Investment Services increased $375 thousand, or 108.8%, to $720 thousand for the nine months ended September 30, 2023, compared to $345 thousand for the comparable period of 2022. The positive change in wealth management services revenue for both the quarter and year-to-date periods was reflective of FNCB's purchase of Chiaro Investment Services, LLC at the end of the third quarter of 2022.10.4%8.0%, to $14.9 million for the nine months ended September 30, 2023, from $13.8 million for the same period of 2022, which primarily reflected higher full-time salaries and benefits associated with staff additions, in addition to an increase in starting salaries and salary ranges, to stay competitive in attracting and retaining qualified staff. Merger and acquisition costs totaled $537 thousand for the year-to-date period of 2023. There were no such merger and acquisition costs recorded during the same period of 2022. Other non-interest expenses increased $486 thousand, or 23.5%, to $2.6 million for the nine months ended September 30, 2023, compared to $4.8$2.1 million for the same nine months of 2016. The improvement resulted primarily from an increase of $378 thousand in net gains on the sale of securities, coupled with2022, which was largely due to increases in other income of $90 thousand. Additionally, net gains on the sale of other real estate owned SBA guaranteed loans each increased $28 thousand comparing the year-to-date periods of 2017legal, insurance and 2016. In addition, FNCB recorded net gains on the sales of other repossessed assets of $47 thousand. Partially offsetting these positive factors were decreases in loan-related fees of $35 thousand and income from bank-owned life insurance of $27 thousand.Non-interest ExpenseFor the three months ended September 30, 2017, non-interest expense decreased $0.2 million, or 2.4%, to $6.4 million, from $6.6 million for the same three months of 2016. Comparing the three months ended September 30, 2017 and 2016, the decline in 2017 was due primarily to a decrease in occupancy expense of $85 thousand, resulting from a decrease in rent expensetelecommunications expenses, expenses associated with long-term facilities planning, coupledthe no-closing-cost home equity line of credit promotion, and increases in correspondent bank charges and servicing costs associated with purchased loan pools. These increases were slightly partially offset by a credit for unfunded commitments and a reduction in legal expenses of $56 thousand, as outstanding litigation continues to be resolved. FNCB also experienced decreases of $39 thousand in regulatory assessments, $38 thousand in advertising expenses, and $18 thousand in other losses. Partially offsetting these decreases were increases in professional fees of $49 thousand and equipment expense of $45 thousand.On a year-to-date basis, non-interest expense declined $117 thousand, or 0.6%, comparingbank shares tax expense. For the nine months ended September 30, 2017 and 2016. Positive fluctuations within non-interest expense include2023, FNCB recorded a decrease in salaries and employee benefitscredit for unfunded commitments of $297$729 thousand, compared to a provision for unfunded commitments of $461 thousand for the nine months ended September 30, 2022. Bank shares tax decreased $415 thousand, or 2.9% due38.0%, to open positions and a decline in severance costs, a decrease of $170$676 thousand or 59.6% in legal expense, and a reduction of $132 thousand, or 20.9%, in regulatory assessments. During 2016, FNCB converted from a national charter to a state charter, which, along with improved risk profile, contributed to the reduction in regulatory expenses for the first nine months ended September 30, 2023, from $1.1 million for the same comparable period of 2017 as compared to 2016. In addition, the resolution of outstanding litigation continues to provide for reductions in legal expenses. Partially offsetting the decreases to non-interest expense were increases in occupancy and equipment expense of $266 thousand, or 20.5%, and $103 thousand, or 8.1%, in equipment expense, respectively, reflecting enhancements made to and expansion of infrastructure as part of FNCB’s network improvement program. In addition, FNCB experienced increases of $100 thousand in other losses due primarily to software abandonment costs, and $97 thousand in expenses of other real estate owned due primarily to valuation adjustments.2022. a provision for income tax expense of $2.5$2.3 million for the nine months ended September 30, 2017, an increase2023, a decrease of $0.9 million$988 thousand, or 30.3%, compared to an income tax expense of $1.6$3.3 million for the same nine monthsperiod of 2016.Management evaluates the carrying amount of its deferred2022. FNCB's effective 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 guidancerate increased 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 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.Management performed an evaluation of FNCB’s deferred tax assets19.13% at September 30, 2017 taking into consideration both positive2023, compared to 17.38% for the same period of 2022. The increase in income tax expense and negative evidence as of that date. Basedthe effective tax rate primarily reflected a timing difference related to the loss on this evaluation, management believes that FNCB’s future taxable income will be sufficient to utilize deferred tax assets. FNCB’s core earningsequity securities recorded in 2016 and the first nine months of 2017 were strong, and management believes projected future core earnings will continue2023, compared to support the recognitionsame period of the deferred tax assets based on future growth projections. Accordingly, management concluded that no valuation allowance for deferred tax assets was required at September 30, 2017.FNCB uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. On September 27, 2017, the Trump Administration released a tax reform framework that includes a reduction in the U.S. corporate income tax rate to 20.0%. If corporate tax rates are 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. The House of Representatives is currently working on a draft of the bill, which is expected to be addressed by Congress later in 2017. It is too early to determine if any of the proposals on tax reform are actionable, or if acted upon, the specific tax reforms that would be implemented. Accordingly, management cannot assess the effect that any tax reform measure effectuated would have on FNCB’s operating results or financial position at the present time.2022. decreased $38.5increased $81.2 million, or 3.2%4.7%, to $1.157$1.827 billion at September 30, 20172023 from $1.196$1.746 billion at December 31, 2016.2022. The change in total assets primarily resulted from a $68.6 million, or 61.0%, reductionreflected increases in loans and leases and cash and cash equivalents, which largely reflectedpartially offset by a decrease in total depositsavailable-for-sale debt securities, as security repayments were used to fund loan originations. Loans and leases, net of $31.9the ACL, increased $83.5 million, or 3.2%7.5%, coupled withto $1.194 billion at September 30, 2023 from $1.110 billion at December 31, 2022. The increase in loans and leases was largely concentrated in commercial and industrial loans reflecting strong demand for the repayment ofequipment financing product offering. Cash and cash equivalents increased $35.2 million, or 83.9%, to $77.1 million at September 30, 2023, from $41.9 million at December 31, 2022. Available-for-sale debt securities decreased $39.0 million, or 8.2%, to $437.1 millionat September 30, 2023 from $476.1 million at December 31, 2022. Total deposits increased $81.7 million, or 5.8%, to $1.502 billion at September 30, 2023 from $1.421 billion at December 31, 2022. Total borrowed funds outstanding at September 30, 2023, were $186.7 million, an increase of $18.2$4.3 million, or 23.1%. The decrease in total deposits was primarily attributable to the anticipated exit of short-term funds related to the sale of a municipal utility in2.4%, from $182.4 million at December 2016. Available-for-sale securities increased $6.0 million, or 2.2%, and net loans increased $27.8 million, or 3.8%. Additional asset fluctuations included a decrease in other real estate owned of $1.0 million as foreclosed properties were sold, a $3.4 million reduction in net deferred tax assets, and a $1.5 million increase in other assets. 31, 2022. declined $68.6increased $35.2 million, or 61.0%83.9%, to $43.8$77.1 millionat September 30, 20172023 from $112.4$41.9 million at December 31, 2016.2022. The significant reduction was dueincrease in cash and cash equivalents resulted primarily to an anticipated decrease in deposits as noted above. FNCB paid dividends of $0.03 and $0.09 per share for the three and nine months ended September 30, 2017, respectively,from an increase of 50.0% as compared$81.7 million in total deposits, including brokered deposits, net activity related to dividendsavailable-for-sale debt securities of $0.02$27.9 million and $0.06a net increase of $4.4 million in advances through the FHLB of Pittsburgh. Funds received from deposits and borrowed funds, along with net cash generated from available-for-sale debt securities, were used to fund demand for the respective periodsFNCB's lending products, resulting in an increase in loans and leases, net of 2016.deferred loan origination fees and costs and unearned income, of $81.4 million. FNCB’sFNCB’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 investmentDebt securities are classified as either held-to-maturity or available-for-sale at the time of purchase based on itsmanagement's intent. Held-to-maturity securities are carried at amortized cost, while available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a component of shareholders’ equity in accumulated other comprehensive income (loss), net of tax. At September 30, 20172023 and December 31, 2016,2022, all debt securities were classified as available-for-sale. Equity securities with readily determinable fair values are carried at fair value, with gains and losses due to fluctuations in market value included in non-interest income in the consolidated statements of income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. Management monitors the investment portfolio regularly. Decisions to purchase or sell investment securities are based upon management’s current assessment of long-long-term and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost.2017, the2023, FNCB's investment portfolio was comprised principally of available-for-sale debt securities including, fixed-rate, taxable and tax-exempt obligations of state and political subdivisions, and fixed-rate and floating-rate securities issued by U.S. government or U.S. government-sponsored agencies, which include mortgage-backed securities and residential and commercial collateralized mortgage obligations (“CMOs”), fixed-rate taxable obligations of state. FNCB also holds fixed- and political subdivisions, andfloating-rate investments in private CMOs, corporate debt securities, asset-backed securities and U.S. Treasury securities. Additionally, FNCB holds equity investments in the common and preferred stock of certain publicly-traded and privately-held bank holding companies. Except for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders’ equity at September 30, 2017.2023. following table presents majority of FNCB's debt securities are fixed-rate instruments and inherently subject to interest rate risk, as the carrying value of available-for-salefixed-rate securities whichfluctuates with changes in interest rates. U.S. Treasury rates increased in the first nine months of 2023 as the FOMC continued to tighten monetary policy. The 2-year U.S. Treasury rate increased 62 basis points to 5.03% at September 30, 2023 from 4.41% at December 31, 2022, while the 10-year U.S. Treasury rate increased 71 basis points to 4.59% at September 30, 2023 from 3.88% at December 31, 2022. Generally, a security's value reacts inversely with changes in interest rates. Available-for-sale securities are carried at fair value, atwith unrealized gains or losses reported in the accumulated other comprehensive income or loss component of shareholder's equity net of deferred income taxes. At September 30, 2017 and2023, FNCB reported a net unrealized holding loss, included in accumulated other comprehensive loss, of $56.5 million, net of deferred income taxes of $15.0 million, an increase of $7.7 million, or 15.8%, compared to a net unrealized holding loss of $48.8 million, net of deferred income taxes of $13.0 million, at December 31, 2016:Composition2022. Any further increase in interest rates could result in further depreciation in the fair value of the Investment Portfolio $ - $ 12,188 144,700 117,873 35,272 18,084 66,459 99,350 22,522 20,576 5,445 3,792 3,512 - 3,192 3,216 935 936 $ 282,037 $ 276,015 Management monitors the investmentFNCB's securities portfolio regularly and adjusts the investment strategy to reflectcapital position. However, changes in liquidity needs, asset/liability strategy and tax planning requirements. FNCB currently has $50.4 million in net operating loss (“NOL”) carryovers, which it uses to offset any taxable income. Becausethe fair value of this tax position, there is no benefit from holding tax-exempt obligations of state and political subdivisions. Accordingly, management’s actions during recent periods with regard to managing the investment portfolio have reflected current tax planning initiatives focused on generating sustained taxable income to be able to reduce NOL carryovers.During the third quarter of 2017, FNCB sold 17 of its available-for-sale securities including 14 U.S. government agencydoes not have an impact on FNCB's regulatory capital ratios, as accumulated other comprehensive income and loss related to available-for-sale debt securities and three taxable obligations of state and political subdivisions. The securities sold had an aggregate amortized cost of $54.1 million. Gross proceeds received totaled $54.5 million, with net gains of $0.4 million realized upon the sales and included in non-interest income.is excluded from regulatory capital.For the nine months ended September 30, 2017, there were a total of 37 securities sold, comprised of 28 U.S. government agency securities, eight obligations of state and political subdivisions, and one corporate bond. Gross proceeds received on the sales and the aggregate amortized cost of the securities sold totaled $131.0 million and $129.6 million, respectively. Year-to-date net gains realized upon the sales amounted to $1.3 million and are included in non-interest income for the nine months ended September 30, 2017.FNCB purchased 18 securities during the third quarter of 2017 totaling $53.4 million, including $51.6 million in U.S. government/ government-sponsored agency securities and $1.7 million in taxable obligations of state and political subdivisions. For the nine months ended September 30, 2017, FNCB purchased 65 securities totaling $139.5 million, including $35.8 million in taxable obligations of state and political subdivisions, $97.7 million in U.S. government /government-sponsored agency securities, $4.0 million of asset-backed securities, and $2.0 million in corporate debt securities.maturitiescomposition of available-for-sale debt securities based on carrying value at September 30, 20172023 and December 31, 2022: $ 31,943 7.31 % $ 32,134 6.75 % 190,339 43.54 % 220,782 46.37 % 73,291 16.77 % 80,407 16.89 % 3,305 0.75 % 3,329 0.70 % 16,131 3.69 % 20,663 4.34 % 69,933 16.00 % 72,507 15.23 % 30,678 7.02 % 30,672 6.44 % 20,864 4.77 % 14,941 3.14 % 658 0.15 % 656 0.14 % $ 437,142 100.00 % $ 476,091 100.00 % suchavailable-for-sale debt securities by major category and maturity period at September 30, 2023. Yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. The yields on tax-exempt obligations of state and political subdivisions are presented on a tax-equivalent basis using an effective interestthe federal corporate income tax rate of 34.0%21.0%. Because residential, commercial and commercialprivate collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary.the Investment PortfolioAvailable-for-Sale Debt Securities $ - $ - $ - $ - $ - $ - $ - - 26,423 118,277 - - - 144,700 2.48 % 2.81 % 2.75 % - - - - 35,272 - 35,271 2.80 % 2.80 % - - - - 66,459 - 66,459 2.49 % 2.49 % - - - - 22,522 - 22,522 2.86 % 2.86 % - - 4,100 1,345 - - 5,445 6.63 % 9.50 % 7.20 % - - - - 3,512 - 3,512 2.45 % 2.45 % 248 2,944 - - - - 3,192 1.45 % 2.09 % 2.04 % - - - - - 935 935 3.45 % 3.45 % $ 248 $ 29,367 $ 122,377 $ 1,345 $ 127,765 $ 935 $ 282,037 1.45 % 2.44 % 2.94 % 9.50 % 2.64 % 3.45 % 2.78 % - 1.17 % - - - 1.17 % 2.97 % 2.97 % 2.28 % 2.37 % - 2.50 % - - - - 2.55 % 2.55 % - - - - 1.99 % 1.99 % - - - - 2.71 % 2.71 % - - - - 3.89 % 3.89 % - 8.50 % 4.61 % - - 4.77 % - - - - 6.96 % 6.96 % - 1.02 % - - - 1.02 % 2.97 % 2.25 % 3.31 % 2.37 % 3.49 % 2.97 % OTTI Evaluation for Credit ImpairmentThereManagement performed a review of all securities in an unrealized loss position as of September 30, 2023 and noted that there was no OTTI recognized duringmaterial change in the nine months endedcredit 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 September 30, 20172023. Based on the results of its review and considering the attributes of these debt securities, management concluded that changes in the fair values of the securities were consistent with movements in market interest rates and spreads relative to when the securities were purchased and not due to the credit quality of the securities or 2016. For additional information regarding management’s evaluation of securitiesissuers. Accordingly, management determined that FNCB was not required to establish an ACL for OTTI, seeany security in an unrealized loss position at September 30, 2023.“Securities”“Securities,” of the notes to consolidated financial statements included in Item 1 hereof.hereof for additional information about management's evaluation of securities for credit impairment.InvestmentLoans and LeasesFHLB the following narrative analysis.Pittsburgh stock has limited marketabilitydeferred fees and is carried at cost. FNCB’s investment in FHLB of Pittsburgh stock totaled $2.5costs and unearned income, increased $81.4 million, and $3.3 millionor 7.2%, to $1.206 billion at September 30, 2017 and2023 from $1.124 billion at December 31, 2016, respectively. Management noted no indicators of impairment for the FHLB of Pittsburgh stock at September 30, 2017.During the third quarter of 2017, FNCB purchased $1.2 million, representing a 4.9% interest,2022. The growth in the common stock of a privately-held bank holding company. The common stockloan portfolio was purchased as part of a private placement pursuant to an exemption from the registration requirements of the Securities Act of 1933 for offerings not involving any public offering. The common stock is not currently traded on any established market, and is not expected to be tradedconcentrated in the near future on any securities exchange or established over-the-counter market. FNCB has elected to account for this transaction as an investment in an equity security without a readily determinable fair value. An equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value. The $1.2 million investment is included in other assets in the consolidated statements of financial condition at September 30, 2017. Management engaged an independent third party to provide a valuation of this investment as of September 30, 2017. The valuation indicated that the investment was not impaired and accordingly, no adjustment for impairment is required at September 30, 2017.LoansFor the first nine months of 2017, FNCB experienced strong loan growth among real estate secured and consumer lending, only partially offset by a decline in the commercial and industrial and municipal loans, which was primarily due to originations generated through the commercial equipment financing product line, including simple interest loans and direct finance and municipal leases. Simple interest loans and direct finance leases are included in commercial and industrial loans and leases, while municipal leases are included in state and politicalmunicipal subdivision segments, resultingloans and leases. Additionally, FNCB experienced modest demand for loans in an increase in total loans of 3.4%. Total loans grew to $756.9 million at September 30, 2017, a $28.1 million increase from $728.8 million at December 31, 2016. Commercialthe commercial real estate and construction, land acquisition and development categories, while demand for consumer loans grew by 4.1% and 46.0%, respectively, during 2017, as the commercial lending team added depth and experience, and the Lehigh Valley loan production office was opened. Contributingdeclined due to the strong growth in residential real estate loans during 2017, FNCB launched a “No Closing Costs Loan Sale” for its “WOW Mortgage,” a non-saleable, fixed-rate mortgage with terms of 7.5, 10 or 14.5 years, and its home equity loan products.higher market rates. 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 56.4% and 56.7% of total loans at September 30, 2017 and December 31, 2016, respectively.From a collateral standpoint, aThe 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, and residential real estate loans, and home equity lines of credit (“HELOCs”), increased $25.6$5.2 million, or 6.0%0.8%, to $455.7$697.8 million at September 30, 20172023 from $430.1$692.6 million at December 31, 2016. The2022. Despite the increase, was attributable to both the residential and commercialratio of real estate segments, as detailed above. Real estate secured loans as a percentageto total loans and leases decreased to 57.9% of total gross loans increase to 60.2% at September 30, 2017 as2023 compared to 59.0% as of61.6% at December 31, 2016.2022, which reflected strong demand for commercial equipment financing.decreased $4.7 million, or 3.1%, during the first nine months of 2017 to $146.0 million at September 30, 2017 from $150.8 million at December 31, 2016. The decrease resulted primarily from the planned exit of a large commercial relationship during the first quarter of 2017. Commercial and industrial loansleases, consist primarily of equipment loans, working capital financing, revolving lines of credit and loans secured by cash and marketable securities. Loans secured by commercial real estate increased $10.0Commercial and industrial loansand leasesincreased $76.3 million, or 4.1%28.0%, to $253.8$348.7 million at September 30, 20172023 from $243.8$272.4 million at December 31, 2016. Commercial real estate2022, which was primarily due to equipment loan and lease origination through 1st Equipment Finance during the nine months ended September 30, 2023. The majority of equipment financing loans include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. Construction,leases were originated through indirect, third-party dealers. Construction, land acquisition and development loans also increased $8.4$7.1 million, or 46.0%10.7%, to $26.8$73.3 million at September 30, 20172023 from $18.4$66.2 million at December 31, 2016, as several large commercial projects were started, and existing projects approach completion.2022. real estate loans totaled $152.3 million at September 30, 2017, an increase of $8.0 million, or 5.5%, from $144.3 million at December 31, 2016. The components of residential real estate loans include fixed-rate and variable-rate, amortizing mortgage loans. HELOCs are not included in this category but are included in consumer loans.loans, home equity term loans and home equity lines of credit ("HELOCs"). 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. Due to transition within its retail lending unit in 2023, FNCB is utilizing a third-party broker to originate saleable 1-4 family residential mortgage loans. Additionally, during the third quarter of 2023, FNCB offersestablished a correspondent relationship with a third party to underwrite and purchase saleable mortgage loans from FNCB. The correspondent relationship provides for the purchase of the loans with servicing releases, which provides for the release of FNCB's servicing and administrative responsibilities. FNCB continues to offer its proprietary “WOW” mortgage product, which is a non-saleable mortgage with maturity terms of 7.5 to 14.519.5 years and offersthat provides customers with an attractive fixed interest rate and low closing costs and home equity lines of credit. During the nine months ended September 30, 2023, FNCB offered customers a guaranteed 30-day close.promotional no closing cost, no fee home equity line of credit. Residential real estate loans totaled $244.8 million at September 30, 2023, a decrease of $5.3 million, or 2.1%, from $250.1 million at December 31, 2022. The decrease in residential real estate loans reflects the transition within the retail lending unit as well as lower demand for residential mortgages due to higher interest rates.grew throughout the first nine months of 2017, increasing $10.9primarily include indirect automobile loans and secured and unsecured personal loans. Consumer loansdecreased by $6.4 million, or 8.5%6.8%, to $138.7 $88.1million at September 30, 20172023 from $127.8$94.5 million at December 31, 2016. The increase was attributable2022, largely due to the purchaserun-off of a pool of refinanced student loans of $5.0 million, in addition to seasonal increases within the indirect auto lendingloan portfolio. Loans and leases to state and municipal governments decreased $4.4political subdivisions increased $6.4 million, or 10.2%9.9%, to $39.3$71.2 million at September 30, 20172023 from $43.7$64.8 million at December 31, 2016, due in part to the payoff of a large tax-anticipation note.The following table summarizes loans receivable, net by category at September 30, 2017 and December 31, 2016:Loan Portfolio Detail $ 152,257 $ 144,260 253,791 243,830 26,805 18,357 146,048 150,758 138,734 127,844 39,271 43,709 756,906 728,758 (84 ) (48 ) 2,667 2,569 (8,862 ) (8,419 ) $ 750,627 $ 722,860 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.2022.industry concentrations within FNCB’s loan portfolioloans and leases receivable, net by segment at September 30, 20172023 and December 31, 2016:2022:Concentrationsand Lease Portfolio Detail $ 43,772 5.78 % $ 38,573 5.29 % 30,669 4.05 % 24,413 3.35 % 20,185 2.67 % 31,989 4.39 % $ 244,762 20.30 % $ 250,221 22.28 % 379,663 31.49 % 376,976 33.56 % 73,265 6.08 % 66,555 5.92 % 348,749 28.92 % 272,024 24.22 % 88,084 7.30 % 92,612 8.24 % 71,229 5.91 % 64,955 5.78 % 1,205,752 100.00 % 1,123,343 100.00 % - (810 ) - 1,784 (12,149 ) (14,193 ) $ 1,193,603 $ 1,110,124 ALLL.ACL. The ALLLACL is established through a provision for loan and leasecredit losses charged to earnings.the ALLL committees,Directors Loan Committees, as well as through oversight fromof the Board of Directors. Management continually evaluates its credit risk management practices to ensure it is reacting to problems inwithin the loan portfolio in a timely manner, although,manner. However, as is the case with any financial institution, a certain degree of credit risk is dependent in part on local and general economic conditions, among other factors, that are beyond management’s control.control.finance,fromfinance, legal, retail lending and credit administration, meetsmeet 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 borrowers 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.efforts for non-performing loans and OREOother real estate owned ("OREO") are actively monitored through the Credit Risk Management Committee. A potential loss on a non-performing asset is generally determined by comparing the outstanding loan balance to the fair market value of the pledged collateral, less cost to sell.Loans are placed on non-accrual when a loan is specifically determined to be impaired or when management believes that the collection of interest or principal is doubtful. This generally occurs when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection, or when management becomes aware of facts or circumstances that the loan would default before 90 days. FNCB determines delinquency status based on the number of days since the date of the borrower’s last required contractual loan payment. When the interest accrual is discontinued, all unpaid interest income is reversed and charged back against current earnings. Any subsequent cash payments received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts, with any excess treated as a recovery of lost interest. A non-accrual loan is returned to accrual status when the loan is current as to principal and interest payments, is performing according to contractual terms for six consecutive months and future payments are reasonably assured.impaired loans rated special mention and substandard in an effort to reduce loan balancesmitigate loss to FNCB by working with customers to develop strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means. Real estate values in FNCB’s market area have appeared to stabilize. Employment conditions within the Scranton-Wilkes-Barre-Hazleton metropolitan statistical area, FNCB’s primary market area, have remained steady comparing data for September 2017 with that of September 2016. However, the unemployment rate in FNCB’s primary market area continues to be considerably higher than that of the Commonwealth of Pennsylvania. ManagementIn addition, management monitors employment and economic conditions within FNCB’s market area, as weakening of conditions could result in real estate devaluations and an increase in loan delinquencies, which could negatively impact asset quality and cause an increase in the provision for loan and lease losses.Under the fair value of collateral method, the impaired amount of the loan is deemed to be the difference between the loan amount and the fair value of the collateral, less the estimated costs to sell. For real estate secured loans, 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.scheduletable presents information about non-performing assets and accruing TDRs at September 30, 20172023 and December 31, 2016:2022:and Accruing TDRs $ 2,642 $ 2,234 $ 5,084 $ 2,763 - - 59 79 2,642 2,234 5,143 2,842 1,088 2,048 1,900 2,160 1,647 1,773 $ 5,630 $ 6,442 $ 6,790 $ 4,615 $ 9,283 $ 4,176 0.35 % 0.31 % 0.43 % 0.25 % 0.37 % 0.26 % 1.01 % 1.26 % 238.97 % 513.68 % 236.22 % 499.40 % 178.92 % 307.54 % TotalTotal non-performing assets decreased $0.8increased $2.2 million, or 12.6%47.1%, to $5.6$6.8 million at September 30, 20172023 from $6.4$4.6 million at December 31, 2016.2022. The decrease was primarily due toincrease reflected an increase in non-performing loans, partially offset by a decreasereduction in other real estate owned of $1.0non-performing assets. Non-performing loans, which include non-accrual loans and loans past due 90 days or more and still accruing, increased $2.3 million, or 46.9%. Non-accrual loans increased by $0.481.0%, to $5.1 million primarily attributable to one large commercial relationship, which was also modified as a TDR during the nine months endedat September 30, 2017.2023 from $2.8 million at December 31, 2022, while other non-performing assets decreased $0.2 million, or 7.1%, to $1.6 million at September 30, 2023 from $1.8 million at December 31, 2022. FNCB’s ratio of non-performing loans to total gross loans increased to 0.35%0.43% at September 30, 20172023 from 0.31%0.25% at December 31, 2016. FNCB’s ratio2022. FNCB is beginning to experience some asset quality stress as evidenced by an increase in total delinquent loan balances, of non-performing assets$1.5 million to $3.6 million at September 30, 2023, from $2.1 million at December 31, 2022. Total delinquencies as a percentage of shareholders’ equity improvedtotal loans and leases, increased 27 basis points to 5.8%0.72% at September 30, 2017 from 7.1%2023, compared to 0.45% at December 31, 2016. Management continues2022. In addition, net loans charge-offs increased $981 thousand to monitor non-accrual$912 thousand, or 0.10% of average loans delinquency trends and economic conditions within FNCB’s market area on an on-going basisleases, for the nine months ended September 30, 2023, compared to net recoveries of $69 thousand, or 0.01% of average loans and leases, for the same period of 2022. The majority of the increase in order to proactively address any collection related issues.net charge-offs was concentrated in consumer loans, reflective of inflationary pressures and higher interest rates.at September 30, 2017 and December 31, 2016 includewas comprised solely of a classified account receivable, the balance of which was $1.6 million at September 30, 2023 and $1.8 million at December 31, 2022. The receivable is secured by an evergreen letter of credit that was received in the amount of $1.9 million, which arose2011 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, and has been includedPennsylvania. The agreement provides for payment to FNCB as real estate building lots are sold to third parties or occupancy permits granted for use in other assets since 2011.a Timeshare development. 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. To date, no lots have been sold; however,In 2019, economic development in this market area began improving and the developer for this project had resumed construction activity, including the completion of substantial infrastructure, and had increased marketing and sales initiatives related to the project. Since 2020, numerous units have been developed and the project continues to be active. A multi-unit building was completed and occupied in 2020 resulting in a first payment of $127 thousand in the second quarter of 2021. A second payment was received in the amount of $126 thousand payment in the second quarter of 2023. Management continues to closely monitor this project and has recently improved andnoted an increase in construction activity related to this project byincluding the developer has increased. Management has classified this asset as substandard due to the lengthconstruction of holding timeadditional multi-unit buildings and will continue to monitor this project closely. Also included in other non-performing assets at December 31, 2016 was foreclosed equipment of $260 thousand, which was solda pool/spa building. Accordingly, FNCB anticipates receiving additional payments during the nine months ended September 30, 2017, resulting in a net gainremainder of $47 thousand that was included in non-interest income within the consolidated statements of income.2023.TDRs at September 30, 2017While FNCB's asset quality has remained favorable, management believes continued economic uncertainty related to supply-chain constraints, inflation, and December 31, 2016 were $10.2 millionthe resulting increase in interest rates could affect borrowers' ability to repay loans, which may have a negative impact on asset quality including, increases in loan delinquencies, non-performing loans, loan charge-offs and $4.3 million, respectively. Accruing and non-accruing TDRs were $9.3 million and $0.9 million, respectively at September 30, 2017 and $4.2 million and $0.1 million, respectively at December 31, 2016. There were eight loan relationships modified as TDRs during the nine months ended September 30, 2017, which incorporated a total of fifteen individual loans. There were three loan relationships, comprised of eight commercial real estate loans totaling $5.3 million, and two loan relationships comprised of four commercial and industrial loans totaling $1.8 million that were modified under varying forms of forbearance agreements during the nine months ended September 30, 2017. Additional TDRs included two consumer loans totaling $85 thousand that had their terms extended and delinquent taxes capitalized, as well as one residential real estate loan in the amount of $63 thousand that had its terms extended. The commercial real estate modifications included a principal forbearance agreement for one loan in the amount of $4.0 million and reductions in required monthly principal payments resulting in balloon payments due at maturity for seven loans to two borrowers aggregating $1.2 million. The four commercial and industrial loan modifications involved the delay of required principal and interest payments for predefined time periods.foreclosures. Approximately $0.8 million in specific reserves to the ALLL were established for TDRs at September 30, 2017, of which $0.6 million represented specific reserves for loans modified during the nine months ended September 30, 2017. In addition, a charge-off in the amount of $0.3 million was recorded as part of the modification of three commercial and industrial loans aggregating $1.8 million to one borrower. All loans modified during 2017 are performing in accordance with their respective modified terms.The average balance of impaired loans was $11.3 million and $7.0 million for the nine months ended September 30, 2017 and 2016, respectively. FNCB recorded $108 thousand and $284 thousand of interest income on impaired loans for the three and nine months ended September 30, 2017, respectively and $46 thousand and $152 thousand for the three and nine months ended September 30, 2016.20172023 and 2016. Loan foreclosures represent recorded investment at time of foreclosure not including the effect of any guarantees:2022. Non-performingNon-Performing Loans $ 3,681 $ 2,739 $ 2,234 $ 3,788 $ 3,760 $ 2,778 $ 2,842 $ 3,863 404 1,126 3,273 3,364 2,371 658 5,431 1,356 - - - - - (940 ) (80 ) (1,177 ) (109 ) (3 ) (180 ) (147 ) 10 60 (20 ) 74 (363 ) (171 ) (1,104 ) (1,991 ) (793 ) (394 ) (2,065 ) (760 ) - - - (925 ) (971 ) (335 ) (1,501 ) (1,421 ) (205 ) (374 ) (1,045 ) (880 ) $ 2,642 $ 2,416 $ 2,642 $ 2,416 $ 5,143 $ 2,728 $ 5,143 $ 2,728 The additional interest income that would have been earned on non-accrual and restructured loans had the loans been performing in accordance with their original terms for the three and nine months ended September 30, 2017 approximated $50 thousand and $116 thousand, respectively and $48 thousand and $175 thousand for the three and nine months ended September 30, 2016, respectively.outlinespresents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at September 30, 20172023 and December 31, 2016:2022:Non-AccrualNon-Accrual Loans 0.28 % 0.37 % 0.18 % 0.13 % 0.00 % 0.00 % 0.35 % 0.31 % 0.81 % 0.81 % Total delinquencies as a percentage of gross loans were 0.81% at both September 30, 2017 and December 31, 2016, primarily due to increases in both non-accrual loans and loans 60-89 days delinquent of $0.4 million each, offset by a decrease in loans past due 30-59 days. In its evaluation of the ALLL, management considers a variety of qualitative factors including changes in the volume and severity of delinquencies. 0.30 % 0.19 % 0.00 % 0.01 % 0.42 % 0.25 % 0.72 % 0.45 % Loan and LeaseCredit LossesALLL 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; andanalysis of customers’ credit quality, including knowledge of their operating environment and financial condition.Evaluations are intrinsically subjective, as the results are estimated based on management knowledge and experience and are subject to interpretation and modification as information becomes available or as future events occur. Management monitors the loan portfolio on an ongoing basis with emphasis on weakness in both the real estate market and the economy in general and its effect on repayment. Adjustments to the ALLL are made based on management’s assessment of the factors noted above.For purposes of management’s analysis of the ALLL, all loan relationships with an aggregate balance greater than $100 thousand that are rated substandard and non-accrual, identified as doubtful or loss, and all TDRs are considered impaired and are analyzed individually to determine the amount of impairment. Circumstances such as construction delays, declining real estate values, and the inability of the borrowers to make scheduled payments have resulted in these loan relationships being classified as impaired. FNCB utilizes the fair value of collateral method for collateral-dependent loans and TDRs for which repayment depends on the sale of collateral. For non-collateral-dependent loans and TDRs, FNCB measures impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. 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 reviewed and revised based on actual experience. The ALLL analysis is adjusted for subsequent events that may arise after the end of the reporting period but before the financial reports are filed.The ALLLACL equaled $8.9$12.2 million at September 30, 2017, an increase of $0.5 million from $8.42023, compared to $14.2 million at December 31, 2016.2022. The increasedecrease resulted from a $2.6 million adjustment from the impact of the adoption of ASU 2016-13, on January 1, 2023, coupled with net charge-offs of $912 thousand, partially offset by a provision for loan and leasecredit losses of $486 thousand$1.5 million, for the nine months ended September 30, 2017, partially offset by net charge-offs of $43 thousand for the same period.The ALLL consists of both specific and general components. The component of the ALLL that is related to impaired loans that are individually evaluated for impairment, the guidance for which is provided by ASC 310 “Impairment of a Loan” (“ASC 310”), was $0.8 million, or 8.7%, of the total ALLL at September 30, 2017, compared to $0.3 million, or 3.6%, of the total ALLL at December 31, 2016. The increase in reserves for loans individually evaluated for impairment resulted primarily from a reserve established for a large commercial and industrial loan relationship that was transferred to non-accrual and modified as a TDR during the nine months ended September 30, 2017. A general allocation of $8.1 million was calculated for loans analyzed collectively under ASC 450 “Contingencies” (“ASC 450”), which represented 91.3% of the total ALLL of $8.5 million. Comparatively, at December 31, 2016, the general allocation for loans collectively analyzed for impairment amounted to $8.1 million, or 96.4%, of the total ALLL. The increase in general reserves primarily reflected an increase in total loans outstanding.2023. The ratio of the ALLLACL to total loans and leases decreased to 1.01% of total loans and leases, net of net deferred loan origination fees and unearned income at September 30, 2017 and2023 from 1.26% of total loans at December 31, 2016 was 1.17% and 1.15%, respectively, based on total loans of $756.9 million and $731.8 million, respectively.2022. ALLLACL by major loan category and percent of loans in each category to total loans at September 30, 20172023 and December 31, 2016:2022:ALLLACL $ 1,178 20.12 % $ 1,171 19.79 % 3,303 33.53 % 3,297 33.46 % 277 3.54 % 268 2.52 % 2,363 19.30 % 1,736 20.69 % 1,433 18.32 % 1,457 17.54 % 308 5.19 % 490 6.00 % $ 8,862 100.00 % $ 8,419 100.00 % $ 1,217 20.30 % $ 2,215 22.28 % 2,703 31.49 % 4,193 33.55 % 1,341 6.08 % 747 5.92 % 5,164 28.92 % 4,099 24.22 % 1,331 7.30 % 1,307 8.25 % 393 5.91 % 503 5.78 % - - 1,129 - $ 12,149 100.00 % $ 14,193 100.00 % ALLLACL by loan category for the three and nine months ended September 30, 20172023 and 2016:2022:ALLLACL $ 8,469 $ 8,559 $ 8,419 $ 8,790 $ 12,873 $ 13,381 $ 14,193 $ 12,416 - - (2,636 ) - 32 37 112 61 - - 5 3 85 - 114 251 - - - - - - - - - - - - 128 18 475 1,082 344 17 436 49 132 134 438 652 474 394 1,706 757 - - - - - - - - 377 189 1,139 2,046 818 411 2,147 809 16 2 28 4 - 3 - 3 38 1 43 4 67 18 172 242 - - 421 9 - 11 - 11 125 184 304 396 7 12 30 23 48 167 300 475 290 292 1,033 599 - - - - - - - - 227 354 1,096 888 364 336 1,235 878 150 (165 ) 43 1,158 454 75 912 (69 ) 543 (234 ) 486 858 (270 ) 513 1,504 1,334 $ 8,862 $ 8,490 $ 8,862 $ 8,490 $ 12,149 $ 13,819 $ 12,149 $ 13,819 0.02 % (0.02 %) 0.01 % 0.16 % 1.17 % 1.17 % 1.17 % 1.17 % 0.15 % 0.03 % 0.10 % (0.01 )% Other Real Estate OwnedLiabilitiesAt Total liabilities, which consist primarily of total deposits and borrowed funds, increased $82.4 million, or 5.1%, to $1.709 billion at September 30, 2017, OREO consisted of 9 properties2023 from $1.627 billion at December 31, 2022. The increase was due primarily to deposit growth, coupled with an aggregate carrying valueincrease in borrowed funds. Total deposits were $1.502 billion at September 30, 2023, an increase of $1.1$81.7 million, or 5.8%, from $1.421 billion at December 31, 2022, which reflected an increase in interest-bearing deposits, partially offset by a decreasemodest reduction in non-interest-bearing demand deposits. Due to rising interest rates and increased deposit competition within the financial services industry, including FNCB's market area, FNCB experienced deposit migration from non-maturity deposits into time deposits, which resulted from the utilization of $0.9certificate of deposit specials to attract new deposits and retain current customers. Additionally, FNCB experienced normal seasonality within its municipal deposit base, and the need for greater utilization of wholesale funding, including brokered time deposits and advances through the FHLB of Pittsburgh and Federal Reserve Bank. Total interest-bearing deposits increased $89.8 million, or 8.1%, to $1.205 billion at September 30, 2023, from $2.0$1.115 billion at December 31, 2022. Specifically, total time deposits increased $179.3 million, or 12.6%, to $337.2 million at September 30, 2023, compared to $157.9 million at December 31, 2016.2022. The increase in total time deposits was primarily concentrated in brokered certificates of deposits, as FNCB foreclosed upon two residential real estate propertiesutilized wholesale sources as an alternative to advances through the FHLB of Pittsburgh. Additionally, in response to the general increase in interest rates and market demand, FNCB initiated several certificate of deposit specials in the first quarter of 2023. The increase in time deposits was partially offset by decreases in non-interesting bearing demand deposits, as well as interest-bearing demand deposits and savings deposits. Non-interest-bearing demand deposits decreased $8.1 million, or 2.7%, to $297.7 million at September 30, 2023, from $305.9 million at December 31, 2022. Interest-bearing demand deposits totaled $734.4 million at September 30, 2023, a decrease of $74.1 million, or 9.2%, compared to $808.5 million at December 31, 2022. Savings deposits decreased $15.4 million, or 10.4%, to $133.0 million at September 30, 2023, compared to $148.4 million at December 31, 2022. Total borrowed fundsincreased $4.3 million, or 2.4%, to $186.7 million at September 30, 2023, from $182.4 million at December 31, 2022, which was comprised of $176.4 million in FHLB of Pittsburgh advances and $10.3 million in junior subordinated debentures.carrying value of $125 thousand duringper share basis, dividends declared totaled $0.270 per share for the nine months ended September 30, 2017. There was one sale and one partial sale2023, an increase of properties with an aggregate carrying value of $763 thousand during$0.030 per share, or 12.5%, compared to $0.240 per share for the nine months ended September 30, 2017, which resulted in2022. On October 25, 2023, FNCB's Board of Directors declared a net gaindividend of $57 thousand. During the nine months ended September 30, 2016, two properties with a carrying value of $950 thousand were foreclosed upon, and there were three sales and one partial sale of properties with an aggregate carrying value of $1.9 million, which resulted in a net gain on the sales of $29 thousand. The expenses related to maintaining OREO, not including adjustments to property values subsequent to foreclosure, and net of any income from operation of the properties, amounted to $38 thousand and $126 thousand$0.090 per share for the three and nine months ended September 30, 2017, respectively, compared to $64 thousand and $166 thousand, respectively, for the same periods in 2016.FNCB actively markets OREO properties for sale through a varietyfourth quarter 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. The 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 $82 thousand and $322 thousand for the three and nine months ended September 30, 2017, $307 thousand of which is included in expense of other real estate owned in the consolidated statements of income. A $15 thousand valuation adjustment during the three and nine months ended September 30, 2017 was related to an investor loan, and accordingly reduced the liability owed to the investor. Valuation adjustments on OREO properties totaled $31 thousand and $169 thousand for the three and nine months ended September 30, 2016.2023.following table presents the activity in OREO for the three and nine months ended September 30, 2017 and 2016:Activity in OREO $ 1,183 $ 1,628 $ 2,048 $ 3,154 - 713 125 950 (82 ) (31 ) (322 ) (169 ) (13 ) (245 ) (763 ) (1,870 ) $ 1,088 $ 2,065 $ 1,088 $ 2,065 The following table presents a distribution of OREO at September 30, 2017 and December 31, 2016:Distribution of OREO $ 524 $ 641 427 1,380 137 27 $ 1,088 $ 2,048 LiabilitiesTotal liabilities were $1.060 billion at September 30, 2017, a decrease of $45.6Bank's total regulatory capital increased $11.8 million, or 4.1%6.9%, from $1.105 billion at December 31, 2016. The decrease was primarily attributable to a $31.9 million outflow of deposits, coupled with a reduction of $13.2 million in Federal Home Loan Bank of Pittsburgh advances. The decrease in total deposits was due to a $20.7 million, or 2.5%, decrease in interest-bearing deposits to $820.8$181.8 million at September 30, 20172023 from $841.4$170.0 million at December 31, 2016, along with an $11.3 million, or 6.5%2022. FNCB Bank's total risk-based capital and Tier 1 leverage ratios were 13.21% and 9.11%, reduction in non-interest-bearing demand deposits to $162.4 millionrespectively, at September 30, 2017 from $173.7 million2023, compared to 13.11% and 8.77%, respectively, at December 31, 2016.2022. The decrease in interest-bearing deposits primarily reflectedBank's risk-based capital ratios exceeded the anticipated exit of short-term funds related to the sale of a municipal utility deposited during the fourth quarter of 2016. The decrease in non-interest bearing deposits was concentrated in business checking deposits.On September 1, 2017, FNCB accelerated a partial principal repayment in the amount of $5.0 millionminimum regulatory capital ratios required for well capitalized under prompt corrective action regulations. Based on the subordinated notes (“Notes”). This principal repaymentmost recent notification from its primary regulator, the Bank was originally due and payable on September 1, 2018. By accelerating the principal repayment, FNCB is expected to save $225 thousand in interest expense related to the Notes.EquityTotal shareholders’ equity increased $7.1 million, or 7.9%, to $97.5 millionconsidered well capitalized at September 30, 2017 from $90.4 million at2023 and December 31, 2016. The2022. There were no conditions or events since that notification that management believes would have changed this capital improvement resulted from net income for the first nine months of 2017 of $6.3 million, coupled with a $1.7 million increase in accumulated other comprehensive income, which resulted from appreciation in the fair value of available-for-sale securities net of the tax impact of the appreciation. Book value per common share was $5.82 at September 30, 2017, an increase of $0.39 per share, or 7.2%, compared to $5.43 at December 31, 2016.designation.sufficientsufficient amounts of cash to meet cash flow needs. Liquidity is required to fulfill the borrowing needs of FNCB’s credit customers and the withdrawal and maturity requirements of its deposit customers, as well as to meet other financial commitments. FNCB’s liquidity position is impacted by several factors, which include, among others, loan origination volumes, loan and investment maturity structure and cash flows, deposit demand and certificate oftime deposit maturity structure and retention. FNCB has liquidity and contingent funding policies in place that are designed with controls in place to provide advanced detection of potentially significant funding shortfalls, establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate a potential liquidity crisis. Management monitors FNCB’s liquidity position and fluctuations daily, forecasts future liquidity needs, performs periodic stress tests on its liquidity levels and develops strategies to ensure adequate liquidity at all times.times. Additionally, management regularly monitors FNCB's wholesale funding sources taking into consideration the cost of funds, diversification between funding sources and asset/liability management strategies. FNCB utilizes brokered deposits, including one-way purchases through the IntraFi® Network, deposits acquired through a national listing service, as well as overnight and term advances through the FHLB of Pittsburgh as wholesale sources of funds to supplement its deposit gathering initiatives. 2017,2023, cash and cash equivalents totaled $43.8$77.1 million, a decreasean increase of $68.6$35.2 million compared to $112.4$41.9 million at December 31, 2016. Net funds2022, as net cash inflows provided by financing and operating activities were partially offset by net cash outflows provided used in investing activities. Financing activities include deposit gathering, changes in utilization of borrowed funds and capital-related initiatives. During the first nine months of 2023, financing activities provided $80.8 million in net cash, which resulted primarily from a net increase in deposits of $81.7 million and the net proceeds from overnight and term advances through FHLB of Pittsburgh, of $4.4 million. Net cash received from deposit gathering and borrowed funds were $51.2partially offset by the $5.3 million in cash dividends paid to FNCB's shareholders during the nine months ended September 30, 2023. Operating activities include net income, adjusted for the effects of non-cash transactions including, among others, depreciation and amortization and the provision for credit losses, and is the primary source of cash flows from operations. For the nine months ended September 30, 2023, operating activities provided FNCB with $10.0 million in net cash, which reflected net income of $9.6 million, coupled with non-cash positive adjustments of $0.4 million. Partially offsetting these net inflows were net cash outflows used in investing activities that totaled $55.6 million for the nine months ended September 30, 2017, largely representing a decrease in deposits from customers of $31.9 million,2023. Specifically, FNCB's net repayment of FHLB term and overnight borrowings of $13.2 million, and a principal reduction on subordinated debentures of $5.0 million. Investinglending activities used $24.9$82.9 million in net cash forand $15.0 million was utilized in the nine months endedpurchase of available-for-sale debt securities. These investing cash outflows were slightly offset by $10.4 million in cash proceeds received from the sale of available-for-sale debt securities, and $32.5 million of cash provided from maturities, calls and principal payments of available-for-sale debt securities. 2017, driven primarily by a net2023. In addition to cash and cash equivalents of $77.1 million at September 30, 2023, FNCB had ample sources of additional liquidity including approximately $133.3 million in available borrowing capacity from the FHLB of Pittsburgh, and $123.3 million and $28.3 million in available borrowing capacity, respectively, under the Federal Reserve Discount Window BIC and BTFP programs. FNCB also has available unsecured federal funds lines of credit totaling $50.0 million at September 30, 2023, as well as access to various wholesale deposit markets. While management believes FNCB has adequate liquidity to meet its cash flow needs, they are keenly aware that changes in general economic conditions, including inflation, further increases in interest rates and competition, among other factors, could pose potential stress on liquidity should deposits begin exiting the Bank or FNCB's asset quality deteriorates. Additionally, FNCB could experience an increase in loansthe utilization of existing lines of credit as customers manage their own liquidity needs during this time of economic uncertainty. Management continually monitors FNCB's liquidity positions and sources of available liquidity in relation to customersfunding and cash flow needs and evaluates potential sources of $30.1 million. Net cash provided by operating activities totaled $7.4 million.additional liquidity.InterestThe preparation of financial statements in conformity with GAAP requires management to measure FNCB’s financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on FNCB's operations is primarily related to increases in operating expenses. Management considers changes in interest rates to impact our financial condition and results of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. FNCB manages interest rate risk in several ways. Refer to “Interest Rate RiskRisk” in Item 3 for further discussion. There can be no assurance that FNCB will not be materially and adversely affected by future changes in interest rates, as interest rates are highly sensitive to many factors that are beyond its control. Additionally, inflation may adversely impact the financial condition of FNCB's borrowers and could impact their ability to repay their loans, which could negatively affect FNCB's asset quality through higher delinquency rates and increased charge-offs. Management will carefully consider the impact of inflation and rising interest rates on FNCB borrowers in managing credit risk related to the loan and lease portfolio. FNCB manages these objectives through its Asset and Liability Management Committee (“ALCO”) and its Rate and Liquidity and Investment Committees, which consistThe ALCO, comprised of certain members of management and certain members of the finance unit.Bank's board of directors, executive management and other appropriate officers, oversees FNCB's interest rate risk management program. Members of the committeesALCO meet regularlyquarterly, or more frequently as necessary, to develop balance sheet strategies affecting the future level of net interest income, liquidity and capital. The major objectives of ALCO are to: 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; ensure adequate liquiditymaintain a strong capital base; and funding; maintain a strong capital base; and●maximize net interest income opportunities.maximize net interest income opportunities.ourFNCB's liquidity position, the economic environment, anticipated direction of interest rates and FNCB’s earnings sensitivity to changes in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable negative changes in net interest income. Furthermore, as part of its ongoing monitoring, ALCO has been enhanced to require periodicrequires quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques.-100-200 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). -100-200 basis points for simulation purposes. Management recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio. assetasset and liability levels using September 30, 20172023 as a starting point; cashcash flows are based on contractual maturity and amortization schedules with applicable prepayments derived from internal historical data and external sources; and cashcash flows are reinvested into similar instruments so as to keep interest-earning asset and interest-bearing liability levels constant.-100-200 basis points on net interest income and the change in economic value over a one-year time horizon from the September 30, 20172023 levels: (0.8% ) (10.0% ) (3.5% ) (20.0% ) (4.1% ) (5.0% ) (5.1 )% (12.5 )% (8.6 )% (20.0 )% (0.4 )% (12.5 )% (3.3% ) (20.0% ) (7.5% ) (35.0% ) (7.4% ) (10.0% ) (5.0 )% (20.0 )% (10.7 )% (35.0 )% 1.0 % (20.0 )% FNCB was liability rate sensitiveModel results from the simulation at September 30, 2017, as a greater volume of interest-bearing liabilities than interest-earning assets will mature or reprice within a one-year time frame, due2023 indicated that FNCB exhibited moderate interest sensitivity to a significant amount of non-maturity, interest-bearing deposit balances atchanges in interest rates over the end ofnext twelve months. According to the period. Accordingly, model results at September 30, 2017 indicate that FNCB’s2023, in comparison to the base case, net interest income and economic value of equity areis expected to decrease 0.8% and 3.3%, respectively,5.1% under a +200-basis point interest rate shock. DueAdditionally, under a parallel shift in interest rates of +200 basis points, FNCB's economic value of equity ("EVE") is expected to significant earning asset growthdecrease 5.0%. FNCB's interest sensitivity improved in the third quarter of 2017,rates down scenario but increased moderately in the results of the simulationrates up scenarios as compared to model at September 30, 2017 improved in comparison to the results at June 30, 2017 which2023. Management reviews FNCB's ALCO position quarterly, or more frequently as necessary, and implements balance strategies to adjust exposure to changes in interest rates as appropriate. Strategies include, among others, adjusting terms on wholesale funding, utilizing interest rate swap transactions and implementing rate floors on lending arrangements, as appropriate. Model results at June 30, 2023 indicated a decrease to net interest income 2.9% under a -200 basis point interest rate shock and a decrease of 3.2% under a +200-basis point interest rate shock. All modeled exposures to net interest income and economic valueEVE for the next twelve-month horizon are within internal ALCO policy guidelines. equity were expected to decrease 2.8% and 4.7%, respectively, given a +200-basis2023. The FOMC continued its tightening stance with four additional 25-basis point rate shock. assumptions:assumptions, including but not limited to, the nature and timing of interest rate levels, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacements of asset and liability cash flows, and other factors. While assumptions reflect current economic and local market conditions, FNCB cannot make any assurances as to the predictive nature of these assumptions, including changes in interest rates, customer preferences, competition and liquidity needs, or what actions ALCO might take in responding to these changes.ongoingongoing monitoring, ALCO requires periodicquarterly 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 September 30, 20172023 with tax-equivalent net interest income that was projected for the same three-month period. TheThere was a negative variance between actual and projected tax-equivalent net interest income for the three-month period ended September 30, 2017 was $2072023 of approximately $376 thousand, or 2.3%3.0%. Although theThe variance primarily reflected higher actual interest expense on deposits and wholesale borrowings, due primarily to actual higher funding costs than those used in projections. The variance in funding costs was deemed immaterial,largely due to a continued increase in market rates. ALCO performs a detailed rate/volume analysis between actual and projected results in order to continue to improve the accuracy of itits simulation models.normalordinary 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.three-three and nine-month periodsnine months ended September 30, 2017,2023, 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.first nine months of 2017.ended September 30, 2023. For discussion of FNCB’s exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in FNCB’s Form 10-K for the year ended December 31, 2016.2022.FNCB’sFNCB’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of FNCB’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.Act. Based on that evaluation, FNCB’s Chief Executive Officer and Chief Financial Officer concluded FNCB’s disclosure controls and procedures were effective as of September 30, 2017.2023.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. 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, without admitting any fault, wrongdoing or liability, the Individual Defendants 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. On July 1, 2017, FNCB continued to make partial indemnification to the Individual Defendants by commencing monthly principal payments, on behalf of the Individual Defendants, of $25,000 plus accrued interest due to First Northern Bank and Trust Co. As of September 30, 2017, $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. Discovery is complete and the parties have exchanged expert reports. Dispositive motions have been submitted by the parties and the Court heard oral arguments on the motions on August 9, 2017. At this time, FNCB cannot reasonably determine the outcome of 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 other 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 denies 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 Dollars ($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; and 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 was approved by Court Order on May 31, 2017. On March 2, 2017 FNCB paid the Settlement Administrator $750,000 pursuant to the terms and conditions of the Settlement Agreement. Additionally, in association with the subject vehicle loans, FNCB has completed the removal of trade lines on each class members' credit report and has substantially completed satisfying judgments, where applicable, in favor of class members. 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., 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.ManagementIn addition to the risks set forth below and the information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the “Risk Factors” included under Item 1A. to Part I of the 2022 Annual Report. You should be aware that these risk factors and other information may not describe every risk facing FNCB. Additional risks and uncertainties not currently known to us or that we currently deem to be remote or insignificant could adversely affect our business, financial condition and results of operations.doesannounced the signing of the Agreement and Plan of Merger (the “Merger Agreement”) with PFIS, pursuant to which FNCB will merge with and into PFIS, with PFIS as the surviving entity. Under the terms of the Merger Agreement, each share of Company common stock (other than certain shares held by FNCB or PFIS), will be converted into the right to receive 0.1460 shares of common stock of PFIS. The closing price of PFIS common stock on the date that the merger is completed may vary from the closing price of PFIS common stock on the date PFIS and FNCB announced the signing of the PFIS Merger Agreement and the date of the special meeting of Company shareholders regarding the merger. Because the merger consideration is determined by a fixed exchange ratio, FNCB shareholders will not believe there have been any materialknow or be able to calculate the value of the shares of PFIS common stock they will receive upon completion of the merger. Any change in the market price of PFIS common stock prior to completion of the merger may affect the value of the merger consideration. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the riskcompanies’ respective businesses, operations and prospects, and regulatory considerations, among other things. Many of these factors that were previously disclosed in FNCB’s Form 10-K forare beyond the year ending December 31, 2016.control of PFIS and FNCB. – — Unregistered Sales of Equity Securities and Use of Proceeds.Item 3 – Defaults upon Senior Securities.None.–— Mine Safety Disclosures.applicable.applicable.EXHIBIT 101.INS INSTANCE DOCUMENTEXHIBIT 101.SCH EXHIBIT 101.CAL EXHIBIT 101.DEF EXHIBIT 101.LAB EXHIBIT 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) *Filed herewithFiled herewith ± The schedule and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. FNCB Bancorp, Inc. agrees to furnish a copy of such schedules and exhibits, or any section thereof, to the SEC upon request. Registrant: FNCB BANCORP, INC.7, 2017 PresidentPresident and Chief Executive Officer 7, 2017 7, 2017 ControllerPrincipalChief Accounting Officer63