The accompanying notes to consolidated financial statements are an integral part of these statements.

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-owned~~wholly 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-Q~~10-Q and Article ~~10-01~~10-01 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.

~~The~~In 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 lease~~credit 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 1^st 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.

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.

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-K~~10-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 ~~Codification~~2022 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,” ~~replaces~~by 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 at~~present 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")

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 affect~~also 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 assets~~these 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 have~~of 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. Securities~~an 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 ~~2016~~2022 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.

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 withi~~n 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, ~~2017~~2023 and December 31, ~~2016:~~2022:

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, 2017~~2023 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 ~~shows~~presents the ~~amortized cost and approximate fair value~~maturity information of FNCB’s available-for-sale debt securities at September 30, ~~2017 by contractual maturity.~~2023. Expected maturities will differ from contractual ~~maturity~~maturities 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.

~~Gross~~The following table presents the gross proceeds ~~from the sale of~~ ~~available-for-sale securities were $54.5 million~~received, and ~~$131.0 million for the three~~gross 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 no~~on 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 no~~2023 and 2022. Gains and losses realized ~~upon the~~on sales of available-for-sale debt securities ~~for~~are included in non-interest income in the ~~nine months ended September 30, 2016.~~consolidated statements of income.

The following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities ~~with~~in an unrealized ~~losses~~loss position at September 30, ~~2017~~2023 and December 31, ~~2016,~~2022, aggregated by investment category and length of time the securities have been in an unrealized loss ~~position:~~position.

Quarterly, or more frequently if market conditions warrant, management evaluates ~~individual~~securities 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~~ ~~other~~at 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 deterioration~~adverse 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 not~~interest payments, or if there are any indications that ~~FNCB will~~an issuer would not be ~~required~~able 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 ~~individual~~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 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 exist~~loss position at September 30, ~~2017.~~2023.

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 marketability~~publicly traded bank holding companies and ~~is carried at cost. FNCB’s~~an investment in ~~FHLB~~a mutual fund comprised of ~~Pittsburgh stock totaled $2.5 million~~1-4 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.

~~During the third quarter~~At 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 common~~a $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 ~~common~~preferred stock ~~was purchased as part~~pays quarterly dividends at an annual rate of ~~a private placement pursuant to an exemption from the registration requirements~~8.25%. The preferred stock of ~~the Securities Act of 1933 for offerings not involving any public offering. The common stock~~this 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 account~~accounted 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 statements~~As part of ~~financial condition at September 30, 2017. Management~~its qualitative assessment, management engaged an independent third party to provide ~~a valuation~~valuations of this investment as of September 30, ~~2017. The valuation~~2023 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.

The following table summarizes loans ~~receivable, net,~~and leases by ~~category~~ portfolio segment at September 30, ~~2017~~2023 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.

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.

The unpaid principal balance of loans ~~that were guaranteed by~~serviced for others, which includes residential mortgages sold on the ~~Small Business Administration (“SBA”) totaling $322 thousand~~secondary 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 three~~2023 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:~~

~~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.

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 Indicators~~Risk 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 ~~that~~as described in “Credit Risk Profiles – Commercial Loans.” The grading system contains the following basic risk categories:

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

Pass – Assets rated 1 through 5 are considered pass ratings. These assets ~~show no~~are contractually current ~~or potential problems~~as 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 under~~Management believes there is a ~~troubled debt restructuring (“TDRs”) that have been performing for an extended period, do not represent a higher~~low risk of loss ~~and have been upgraded~~related 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.

Certain residential real estate loans, consumer loans, commercial and ~~commercial~~municipal indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that are delinquent 90 days or more are placed on non-accrual status unless collection of the loan is in process and reasonably assured. FNCB utilizes ~~accruing~~performing (accruing) versus ~~non-accrual~~non-performing (non-accrual) status as the credit quality indicator for these loan pools.

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 table~~s present~~ presents the credit risk profile of loans and leases summarized by portfolio segment and year of origination at September 30, 2023:

The following table summarizes activity in the ACL by major category for the three and nine months ended September 30, ~~2017~~2023 and ~~December 31, 2016:~~2022.

The following table presents ending loan and lease balances and related ACL by portfolio segment and impairment methodology at September 30, 2023:

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:

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:

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:

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, ~~2017~~2023, 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 remain~~delinquent. Once a loan is placed on non-accrual status, it remains on non-accrual status until ~~they are~~it has been brought current, ~~have six~~has 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 loans~~Loans past due 90 days or more and still accruing were $59 thousand at September 30, ~~2017~~2023 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.

Table of ~~past due and non-accrual loans at September 30, 2017 and December 31, 2016:~~

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

Contents

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 ~~are~~were evaluated collectively for impairment as ~~homogenous~~homogeneous 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 ~~category~~segment recognized on ~~impaired~~impaired 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.

~~(1) Interest income represents income recognized on accruing TDRs.~~

The additional interest income that would have been earned on non-accrual and restructured loans had these loans performed in accordance with their original terms approximated ~~$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 Loans~~Loan 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, 2017~~while 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 such~~no 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 three~~to 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 TDRs~~was one modification made to a borrower experiencing financial difficulty during the nine months ended September 30, ~~2017, which incorporated~~2023. The modification involved a ~~total~~12-month extension of ~~fifteen individual loans. There were three~~term 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 ~~loan~~with 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 commercial~~residential 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 modified~~borrowers 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~~

Table of ~~TDRs that were modified within the previous 12 months which have defaulted (defined as past due 90 days or more) during the~~ ~~nine months ended September 30, 2017 and 2016:~~

Contents

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 by~~three 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

~~Note 5.~~

~~Deposits~~

The following table presents deposits by major category at September 30, ~~2017~~2023 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

Table of Contents

Note 7. Derivative and Hedging Transactions

~~Total deposits decreased $31.9 million~~RiskManagementObjectiveofUsingDerivatives

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 ~~balances~~consolidated statements of ~~larger commercial deposit relationships. The decrease in interest-bearing deposits was primarily due to the anticipated exit of short-term funds~~financial condition related to the ~~sale~~carrying 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:

~~Note 6.~~
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

September 30, December 31, September 30, December 31,

2023

2022

2023

2022

Fixed Rate Loans (1)
$ 24,821 - $ 179 -
Total
$ 24,821 - $ 179 -

(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.

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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:

			*Derivative Assets*								*Derivative Liabilities*
			*September 30, 2023*			*December 31, 2022*					*September 30, 2023*			*December 31, 2022*
(in thousands)	*Notional Amount*		*Balance Sheet Location*	*Fair Value*		*Balance Sheet Location*	*Fair Value*		*Notional Amount*		*Balance Sheet Location*	*Fair Value*		*Balance Sheet Location*	*Fair Value*
Derivatives designated as hedging instruments
Interest rate products	$	85,000	Other assets	$	1,929	Other assets	$	1,173	$	-	Other liabilities	$	-	Other liabilities	$	-
Total derivatives designated as hedging instruments					1,929			1,173					-			-
Derivatives not designated as hedging instruments
Interest rate swaps	$	25,125	Other assets	$	1,670	Other assets	$	931	$	25,125	Other liabilities	$	1,670	Other liabilities	$	931
Risk participation transaction		10,631			-			-					-			-
Total derivatives not designated as hedging instruments					1,670			931					1,670			931

Net Derivatives on the statements of financial condition					3,599			2,104					1,670			931
Gross amounts not offset in the statements of financial condition
Financial instruments					-			-					-			-
Cash collateral (1)					3,599			1,946					-			-
Net derivative amounts				$	-		$	158				$	1,670		$	931

(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.

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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:

	For the Three Months Ended September 30, 2023
(in thousands)	Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Derivative			Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Included Component			Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Excluded Component		Location of Gain or (Loss) Recognized from AOCL into Income	Amount of Gain or (Loss) Reclassified from AOCL into Income			Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component			Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component
Derivatives in cash flow hedging relationships
Interest rate products	$	(369	)	$	(369	)	$	-	Interest expense	$	(3	)	$	(3	)	$	-
Total	$	(369	)	$	(369	)	$	-		$	(3	)	$	(3	)	$	-

	For the Three Months Ended September 30, 2022
(in thousands)	*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Derivative*			*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Included Component*			Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Excluded Component		*Location of Gain or (Loss) Recognized from AOCL into Income*	*Amount of Gain or (Loss) Reclassified from AOCL into Income*			*Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component*			*Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component*
Derivatives in cash flow hedging relationships
Interest rate products	$	144		$	144		$	-	Interest expense	$	68		$	68		$	-
Total	$	144		$	144		$	-		$	68		$	68		$	-

	*For the Nine Months Ended September 30, 2023*
(in thousands)	*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Derivative*		*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Included Component*		*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Excluded Component*		*Location of Gain or (Loss) Recognized from AOCL into Income*	*Amount of Gain or (Loss) Reclassified from AOCL into Income*		*Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component*		*Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component*
Derivatives in cash flow hedging relationships
Interest rate products	$	1,228	$	1,228	$	-	Interest expense	$	288	$	288	$	-
Total	$	1,228	$	1,228	$	-		$	288	$	288	$	-

	*For the Nine Months Ended September 30, 2022*
(in thousands)	*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Derivative*		*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Included Component*		*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Excluded Component*		*Location of Gain or (Loss) Recognized from AOCL into Income*	*Amount of Gain or (Loss) Reclassified from AOCL into Income*		*Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component*		*Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component*
Derivatives in cash flow hedging relationships
Interest rate products	$	312	$	312	$	-	Interest expense	$	98	$	98	$	-
Total	$	312	$	312	$	-		$	98	$	98	$	-

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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:

	Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
	Three Months Ended						Three Months Ended
	September 30, 2023						September 30, 2022
(in thousands)	Interest Income			Interest Expense			Interest Income		Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of financial performance in which the effects of fair value or cash flow hedges are recorded	$	58		$	(3	)	$	-	$	68

The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Hedged items	$	(179	)	$	-		$	-	$	-
Derivatives designated as hedging instruments	$	236		$	-		$	-	$	-
Interest contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	-		$	(3	)	$	-	$	68
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	-		$	-		$	-	$	-

Amount of gain or (loss) reclassified from accumulated OCI into income - included component	$	-		$	(3	)	$	-	$	68
Amount of gain or (loss) reclassified from accumulated OCI into income - excluded component	$	-		$	-		$	-	$	-

	*Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships*
	*Nine Months Ended*					*Nine Months Ended*
	*September 30, 2023*					*September 30, 2022*
(in thousands)	*Interest Income*			*Interest Expense*		*Interest Income*		*Interest Expense*
Total amounts of income and expense line items presented in the consolidated statements of financial performance in which the effects of fair value or cash flow hedges are recorded	$	58		$	288	$	-	$	98

The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Hedged items	$	(179	)	$	-	$	-	$	-
Derivatives designated as hedging instruments	$	236		$	-	$	-	$	-
Interest contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	-		$	288	$	-	$	98
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	-		$	-	$	-	$	-

Amount of gain or (loss) reclassified from accumulated OCI into income - included component	$	-		$	288	$	-	$	98
Amount of gain or (loss) reclassified from accumulated OCI into income - excluded component	$	-		$	-	$	-	$	-

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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

~~Income Taxes~~

The following table presents a reconciliation between the effective income tax expense and the in~~come~~income 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, 2016~~2023 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, a~~There was no valuation allowance for deferred tax assets ~~was not required~~recorded at September 30, ~~2017~~2023 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

~~(1) Represents loans to related parties that ceased being an insider during the period.~~

	*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, ~~2017~~2023 and December 31, ~~2016 amounted to $103.8~~2022 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.

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Note 10. Commitments and Contingencies

~~Note~~ 8.

~~Contingencies~~

~~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 complaint~~discount rate that represents FNCB's incremental borrowing rate at the commencement date. ROU assets are included in other assets and operating lease liabilities are included in other liabilities in the ~~Court~~consolidated statements of ~~Common Pleas for Lackawanna County (“Shareholder Derivative Suit”) against certain present~~financial condition. As of September 30, 2023, ROU assets and ~~former directors~~lease 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-interest~~occupancy expense, while operating lease expenses associated with automobiles and office equipment are included in equipment expense in the consolidated statements of ~~income~~income. Rental expense incurred for the ~~year~~three and nine months ended ~~December 31, 2013. On April 1, 2014, FNCB paid~~September 30, 2023 was $100 thousand and $301 thousand, respectively, and $123 thousand and $292 thousand for the ~~$2.5 million~~three 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, Litigation~~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.

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

~~Note~~ 9.

~~Stock~~ ~~Compensation~~ ~~Plans~~

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 authorizes~~employees 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 ~~54,549~~140,445 and ~~67,600~~71,860 shares of restricted stock, respectively, under the LTIP. ~~At September 30, 2017, there were 977,619 shares~~Upon adoption of ~~common stock available for award~~the 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.

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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 regulations~~Regulations 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, cash~~Cash 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 the~~three 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 issued~~transactions, 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, ~~2017~~2023 totaled ~~65,240. Common shares issued under the DRP~~1,439 and 8,814, respectively, and 1,550 and 3,919, respectively for the ~~comparable~~same 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 ~~2017~~2023 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. Capital~~practices. FNCB's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of September 30, 2023 and December 31, 2022, that FNCB and the Bank met all applicable capital adequacy requirements.

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Current quantitative measures established by regulation to ensure capital adequacy require ~~FNCB~~the Bank to maintain minimum amounts and ratios (set forth in the tables below) of ~~total~~Total capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).

The The following tables present summary information regarding ~~FNCB’s and~~ the Bank’s risk-based capital and related ratios at September 30, ~~2017~~2023 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


*Applies to the Bank only.

	*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.

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The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). A financial asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

●

Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active ~~markets.~~markets;

●

Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market ~~data~~;data; and

●

Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A description of the valuation methodologies used for assets recorded at fair value ~~and for estimating fair value~~ ~~of financial instruments not recorded at fair value,~~ is set forth below.

~~Cash, Short-term Investments, Accrued Interest Receivable and Accrued Interest Payable~~

~~For these short-term instruments, the carrying amount is a reasonable estimate of fair value.~~

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-recognized~~nationally recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing (Level 2 inputs), to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider observable data that may include, among other things, dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, and are based on market data obtained from sources independent from FNCB. The Level 2 investments in FNCB’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. Management has determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in FNCB’s portfolio are not exchange-traded, and such non-exchange-traded fixed income securities are typically priced by correlation to observed market data. FNCB has reviewed the pricing service’s methodology to confirm its understanding that such methodology results in a valuation based on quoted market prices for similar instruments traded in active markets, quoted markets for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which the significant assumptions can be corroborated by market data as appropriate to a Level 2 designation.

For those securities for which the inputs used by an independent pricing service were derived from unobservable market information, FNCB evaluated the appropriateness and quality of each price. Management reviewed the volume and level of activity for all classes of securities and attempted to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value (fair values based on Level 3 inputs). If applicable, the adjustment to fair value was derived based on present value cash flow model projections obtained from third party providers using assumptions similar to those incorporated by market participants.

At September 30, ~~2017,~~2023, FNCB owned ~~four~~30 corporate debt securities with an aggregate amortized cost and fair value of ~~$5.0~~$35.1 million and ~~$5.5~~$30.7 million, respectively. ~~The~~At September 30, 2023, the market for ~~these~~four corporate debt securities ~~at September 30, 2017~~with an amortized cost and fair value of $8.0 million and $6.7 million, respectively, was not active ~~and markets~~based on transaction criteria for similar ~~securities are also not active.~~instruments. FNCB obtained valuations for these securities from a ~~third-party~~third-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’s~~providers’ analysis and is actively involved in the valuation process, including reviewing and ~~verifying~~ the ~~assumptions~~population 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, ~~they~~while inputs are based on ~~estimates about~~actual transactions, the ~~assumptions market participants would use in pricing this type~~relative number of ~~asset and developed based on the best information available~~transactions in the ~~circumstances rather than on observable inputs. As it relates~~population is small and subjective assumptions are used in considering factors considered to ~~fair value measurements, once each issuer is categorized and~~incorporate 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-party~~FNCB's third-party service ~~provider for the period it continues to use an outside valuation service.~~

~~Loans~~provider.

~~Except for~~ ~~collateral-dependent impaired loans,~~Equity Securities

The estimated fair values of ~~loans~~equity securities are ~~estimated~~determined by ~~discounting the projected future cash flows using market discount rates that reflect the credit, liquidity, and interest rate risk inherent in the loan. Projected future cash flows~~obtaining 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 value~~potential 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 F~~~~unds~~

~~FNCB~~ ~~uses discounted cash flows using rates currently available for debt with similar terms and remaining maturities to estimate fair value.~~counterparty.

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~~Commitments to Extend Credit~~Assets and ~~Standby Letters of C~~~~redit~~

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~~ M~~easured~~ Liabilities Measured at Fair Value on a R~~ecurring~~ B~~asis~~Recurring Basis

The following tables present the financial assets and liabilities that ~~are~~were measured at fair value on a recurring basis at September 30, ~~2017~~2023, 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 transfers~~two 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.

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The following table presents a reconciliation and consolidated statement of operations ~~classification~~classifications 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
Nine Months Ended September 30,

(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 M~~easured~~ Measured at Fair Value on a N~~on-~~R~~ecurring~~ B~~asis~~Non-Recurring Basis

The following tables present a~~ssets~~assets 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

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

1,894

Appraisal of collateral

Selling costs

10.0

Individually evaluated loans - other

5,698

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 to~~adjust the appraised ~~value~~values as necessary to consider any declines in real estate values since the time of the appraisal. For impaired loans that are not collateral-dependent, fair value is determined using the discounted cash flow method. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance or is charged off. The amount shown is the balance of impaired loans, net of any charge-offs and the related allowance for ~~loan~~credit losses.

~~OREO properties are recorded at fair value less the estimated costs to sell at the date~~

Table of FNCB’s acquisition of the property. Subsequent to acquisition of the property, the balance may be written down further. It is FNCB’s policy to obtain certified external appraisals of real estate collateral underlying impaired loans and OREO, and estimate fair value using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent and executed sale agreements.

Contents

The following table summarizes the estimated fair values of FNCB’s financial instruments using an exit price notion at September 30, ~~2017~~2023 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.

	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	$	43,810	$	43,810	$	112,445	$	112,445
Securities available for sale	See previous table		282,037		282,037		276,015		276,015
FHLB of Pittsburgh stock	Level 2		2,450		2,450		3,311		3,311
Financial assets:
Cash and cash equivalents										Level 1	$	77,071	$	77,071	$	41,916	$	41,916
Available-for-sale debt securities										See previous table		437,142		437,142		476,091		476,091
Equity securities										Level 1		6,104		6,104		7,717		7,717
Restricted stock										Level 2		8,842		8,842		8,545		8,545
Loans held for sale	Level 2		147		147		596		596	Level 2		-		-		60		60
Loans, net	Level 3		750,627		744,660		722,860		712,263
Loans and leases, net										Level 3		1,193,603		1,138,396		1,110,124		1,079,266
Accrued interest receivable	Level 2		3,203		3,203		2,757		2,757	Level 2		6,599		6,599		5,957		5,957
Equity securities without readily determinable fair values	Level 3		1,160		1,160		-		-
Servicing rights	Level 3		254		746		215		744	Level 3		192		595		254		621
Derivative assets										Level 2		3,370		3,599		1,946		2,104

Financial liabilities
Financial liabilities:
Deposits	Level 2		983,212		949,204		1,015,139		968,904	Level 2		1,502,375		1,497,861		1,420,647		1,416,272
Borrowed funds	Level 2		60,660		60,678		78,847		78,923	Level 2		186,733		185,782		182,360		182,108
Accrued interest payable	Level 2		244		244		242		242	Level 2		1,001		1,001		171		171
Derivative liabilities										Level 2		1,637		1,670		921		931

Note ~~12.~~14. Earnings per Share

For FNCB, thethe numerator of both the basic and diluted earnings per share of common ~~share~~stock 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 average~~weighted-average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common share equivalents utilizing the treasury stock method. ~~Common~~For the three and nine months ended September 30, 2023 and 2022, common share equivalents ~~are outstanding stock options to purchase FNCB’s common~~consisted entirely of incremental shares ~~and~~of unvested restricted stock.

The following table presents the calculation of both basic and diluted earnings per share of common ~~share~~stock for the three and nine months ended September 30, ~~2017~~ 2023 and ~~2016:~~2022:

	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	$	2,272	$	2,017	$	6,261	$	4,785	$	4,162	$	5,435	$	9,630	$	15,526

Basic weighted-average number of common shares outstanding		16,757,963		16,593,811		16,711,172		16,554,391		19,776,342		19,687,766		19,724,956		19,765,814
Plus: Common share equivalents		19,708		-		17,680		1,763		18		9,281		2,834		21,041
Diluted weighted-average number of common shares outstanding		16,777,671		16,593,811		16,728,852		16,556,154		19,776,360		19,697,047		19,727,790		19,786,855

Income per common share:
Basic	$	0.14	$	0.12	$	0.37	$	0.29	$	0.21	$	0.28	$	0.49	$	0.79
Diluted	$	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.

Note ~~13.~~ 15. Other Comprehensive (Loss) Income

The following tables summarize the reclassifications out of accumulated other comprehensive (loss) income ~~(loss)~~ for the three and nine months ended September 30, ~~2017~~ 2023 and ~~2016, which are~~2022, comprised entirely of unrealized gains and losses on available-for-sale debt securities:

	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	$	(367	)	Net gain on sale of securities	$	(1,338	)	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	$	(252	)	Net gain (loss) on the sale of available-for-sale debt securities
Taxes		125		Income taxes		455		Income taxes		-	Income taxes		53		Income taxes
Net of tax amount	$	(242	)		$	(883	)		$	-		$	(199	)

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
$ (960 )
Net gain on sale of securities
Taxes
-
Income taxes
326
Income taxes
Net of tax amount
$ - $ (634 )

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	*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	$	35		Net gain (loss) on the sale of available-for-sale debt securities
Taxes		-	Income taxes		(7	)	Income taxes
Net of tax amount	$	-		$	28

The following table summarizes the changes in accumulated other comprehensive (loss) income, ~~(loss),~~ net of tax for the three and nine months ended September 30, ~~2017~~ 2023 and ~~2016:~~2022:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands)

2017

2016

2017

2016

Beginning balance
$ 1,196 $ 7,023 $ (1,560 ) $ (61 )
Other comprehensive income before reclassifications
(844 ) (791 ) 2,553 6,927
Amounts reclassified from accumulated other comprehensive income
(242 ) - (883 ) (634 )
Net other comprehensive income during the period
(1,086 ) (791 ) 1,670 6,293
Ending balance
$ 110 $ 6,232 $ 110 $ 6,232

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
(in thousands)	*2023*			*2022*			*2023*			*2022*
Balance, beginning of period	$	(46,236	)	$	(34,400	)	$	(48,028	)	$	6,352
Other comprehensive loss before reclassifications		(8,958	)		(17,726	)		(6,967	)		(58,506	)
Amount reclassified from accumulated other comprehensive (loss) income		-			-			(199	)		28
Net other comprehensive loss during the period		(8,958	)		(17,726	)		(7,166	)		(58,478	)
Balance, end of period	$	(55,194	)	$	(52,126	)	$	(55,194	)	$	(52,126	)

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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, ~~2016 and Forms 10-Q for the quarters ended March 31, 2017 and June 30, 2017~~2022 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.

FNCB 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.

FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION

FNCB may from time to time make written or oral “forward-looking statements,” including statements contained in ~~our~~its filings with the Securities and Exchange Commission (“SEC”), in its reports to shareholders, and in ~~our~~its other communications, which are made in good faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to FNCB’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, 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,” ~~“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 tax~~regulatory actions and ~~fiscal policies and laws, including interest rate policies~~reforms; 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 with~~manage 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 ~~composition~~right of one or both of the parties to terminate the merger agreement between FNCB and ~~concentrations~~PFIS; 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 risk~~FNCB 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 ~~adequacy~~announcement, 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 ~~pay~~retain 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 ~~ability~~loss of management and other key personnel; dependence on the use of data and modeling in both its management’s decision-making generally and in meeting regulatory expectations in particular; additional risk arising from new lines of business, products, product enhancements or services offered by FNCB; inaccuracy of appraisals and other valuation techniques FNCB uses in evaluating and monitoring loans secured by real property and other real estate owned; unsoundness of other financial institutions; damage to FNCB’s reputation; defending litigation and other actions; dependence on the accuracy and completeness of information about customers and counterparties; risks arising from future expansion or acquisition activity; environmental risks and associated costs on its foreclosed real estate assets; any remediation ordered, or adverse actions taken, by federal and state regulators, including requiring FNCB to ~~retain key personnel;~~act as a source of financial and managerial strength for the ~~impact~~FNCB Bank in times of stress; costs arising from extensive government regulation, supervision and possible regulatory enforcement actions; new or changed legislation or regulation and regulatory initiatives; noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations; failure to comply with numerous "fair and responsible banking" laws; any ~~pending~~violation 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 FNCB~~Consumer Financial Protection Bureau; inability to attract ~~additional capital investment; the impact of changes~~and retain its highest performing employees due to potential limitations on incentive compensation contained in ~~financial services’ laws~~proposed 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.

FNCB cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place undue reliance on any forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by FNCB on its website or otherwise. FNCB does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of FNCB to reflect events or circumstances occurring after the date of this report.

Readers should carefully review the risk factors described in the ~~Annual Report and other~~ documents that FNCB periodically files with the SEC, including ~~its~~the 2022 Annual Report and Quarterly Reports on Form ~~10-K~~10-Q for the ~~year~~periods ended ~~December~~March 31, ~~2016.~~2023 and June 30, 2023.

Any references to FNCB's website, www.fncb.com or any variation thereof, shall not incorporate the contents of such website into this Report.

Table of Contents

CRITICAL ACCOUNTING POLICIES

In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.

~~FNCB~~’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 ~~allowance~~Allowance 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.

The judgments used by management in applying the critical accounting policies discussed below may be affected by changes and/or deterioration in the economic environment, which may impact future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the ~~ALLL~~ACL in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in FNCB’s investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to impairment losses.

Allowance for ~~Loan~~Credit Losses

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 ~~Lease~~requires consideration of a broader range of reasonable and supportable information to form credit loss estimates in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13, 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.

Management evaluates the credit quality of FNCB’s loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ~~ALLL~~ACL on a quarterly basis. The ~~ALLL~~ACL is established through a provision for ~~loan~~credit losses charged to earnings and is maintained at a level that management considers ~~adequate~~ to ~~absorb estimated probable~~be an estimate of the lifetime expected credit losses ~~inherent in~~of 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.

Determining the amount of the ~~ALLL~~ACL 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, ~~and~~as 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 ~~ALLL~~ACL 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.

See N~~ote~~Note 4, ~~“Loans”~~“Loans and Leases” of the notes to consolidated financial statements included in Item 1 hereof for additional information about the ~~ALLL.~~ACL.

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 ~~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’s~~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 ~~less than book value,~~entirely the ~~severity~~result of ~~the investment’s decline, any credit deterioration~~noncredit factors. As part of ~~the issuer,~~its evaluation, management first considers whether, ~~management~~FNCB intends to sell, ~~the security, and whether~~or if it is more likely than not that ~~FNCB will~~it would be required to sell, ~~the~~any 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 deemed~~basis of the security to ~~have OTTI are written down by~~its fair value. If either of those selling events is not expected, FNCB must determine whether any of the ~~impairment~~decline 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 ended~~results of its review as of September 30, ~~2017~~2023, management concluded that changes in the fair values of the securities were consistent with movements in market interest rates and ~~2016 within~~spreads relative to when the ~~consolidated statements~~securities 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 to~~See 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 Owned~~

~~OREO consists~~

Table of ~~property acquired by foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a loan, and bank premises that~~ are no longer used for operation or for future expansion. OREO is held for sale and is initially recorded at fair value less costs to sell at the date of acquisition or transfer, which establishes a new cost basis. Upon acquisition of the property through foreclosure or deed-in-lieu of foreclosure, any adjustment to fair value less estimated selling costs is recorded to the ALLL. The determination is made on an individual asset basis. Bank premises no longer used for operations or future expansion are transferred to OREO at fair value less estimated selling costs with any related write-down included in non-interest expense. Subsequent to acquisition, valuations are periodically performed and the assets are carried at the lower of cost or fair value less cost to sell. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed agreements of sale, unless management determines that conditions exist that warrant an adjustment to the value. Costs relating to the development and improvement of the OREO properties may be capitalized; holding period costs and any subsequent changes to the valuation allowance are charged to expense as incurred.

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Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an ~~entity~~’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.

FNCB records an income tax provision or benefit based on the amount of ~~tax, including alternative minimum~~ tax currently payable or receivable and the change in deferred tax assets and liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Management conducts quarterly assessments of all available positive and negative evidence to determine the amount of deferred tax assets that will more likely than not be realized. FNCB establishes a valuation allowance for deferred tax assets and records a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, management considers past operating results, estimates of future taxable income based on approved business plans, future capital requirements and ongoing tax planning strategies. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period depending on the related circumstances. The recognition of deferred tax assets requires management to make significant assumptions and judgments about future earnings, the periods in which items will impact taxable income, future corporate tax rates, and the application of inherently complex tax laws. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which may result in equity and earnings volatility because such changes are reported in 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.

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, ~~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.

Refer to Note 6,8, “Income ~~Taxes”~~Taxes,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about income taxes.

New Authoritative Accounting Guidance and Accounting Guidance to be Adopted in Future Periods

Refer to Note 2, “New Authoritative Accounting ~~Guidance”~~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 ended~~adopted 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.

Executive Summary

The following overview should be read in conjunction with this MD&A in its entirety.

~~On June 30, 2016, First National Community Bancorp, Inc.,~~Overview

The Federal Open Market Committee ("FOMC") continued to tighten monetary policy through the ~~parent company~~first nine months of ~~First National Community Bank, announced that following receipt~~2023, 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 approvals~~rate increases from the ~~Pennsylvania Department~~period 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 ~~Banking~~industry-wide liquidity pressures and ~~Securities, First National Community~~rate sensitivity of depositors. Higher interest rates and competition have resulted in an increase in deposit and wholesale funding costs.

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 ~~had completed a charter conversion from a national bank to a Pennsylvania state~~will merge with and into Peoples Bank, with Peoples Bank as the surviving bank and as a ~~result~~wholly-owned subsidiary of PFIS. Under the terms of the ~~conversion, First National Community Bank changed its legal name to FNCB Bank. Both~~Merger 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 company~~boards 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 amendment~~by FNCB as Exhibit 2.1 to ~~its articles of incorporation~~the 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 amended~~be 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.

FNCB recorded consolidated net income of ~~$2.3~~$4.2 million, or ~~$0.14~~$0.21 per basic and diluted common share, for the ~~three-month period~~three 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 ~~comparable~~three 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.

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Net income for the nine months ended September 30, ~~2017 was $6.3~~2023 totaled $9.6 million, or ~~$0.37~~$0.49 per basic and diluted common share, ~~an increase~~a 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 periods~~nine 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 ~~periods~~period 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.

For the three and nine months ended September 30, ~~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 ~~same~~respective 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 share~~10.38%, 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 ~~board~~comparable periods of ~~directors of~~2022. FNCB declared ~~a dividend~~and paid dividends to holders of ~~$0.04~~common 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, as~~2023 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 quarter~~quarter-to-date and year-to-date periods of ~~2016,~~2022.

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.

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 ~~of $0.6 million and $0.3 million, respectively, coupled with a decrease of $0.2 million in~~run rates, as well as controlling non-interest expense. ~~Partially offsetting these positive fluctuations was a provision for loan~~FNCB 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 loan~~create 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 ~~sale~~existing 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 80^thbirthday. 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 order~~origination platforms and utilizing artificial intelligence and robotics to ~~facilitate loan growth initiatives, on March 7, 2017,~~streamline workflows. FNCB ~~opened a lending center immediately adjacent~~continues 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 positioning~~FNCB'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.

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~~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.

Summary of Performance

Net Interest Income

Net interest income, 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 represents~~funds, is the ~~largest component~~primary source of ~~FNCB’s operating income and, as~~earnings 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 ~~shown~~presented on a fully tax-equivalent basis ~~and is calculated by adjusting tax-free interest~~ using ~~a marginal~~the statutory corporate tax rate of ~~34.0%~~21.0% in ~~order to equate the yield to that of taxable interest rates.~~2023 and 2022.

~~Since~~In 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 increase~~nine 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 ~~increases~~total 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 an~~2023. 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 yields~~the 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 quarter~~Middle East, as well as increasing tension and ~~year-to-date period~~unrest worldwide, could drive further inflation and place additional strain on economic conditions in the United States, the banking industry and global markets.

In response to competition within our market area and rate-sensitivity of ~~2017~~depositors 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 ~~compared~~deposit 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 periods~~FOMC 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 loans~~wholesale 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 ~~begun~~an unfavorable impact on profitability and future net interest levels. Management monitors FNCB's interest rate risk and sensitivity to ~~reprice upward. The increase~~changes in market interest rates ~~has also led~~through the Asset Liability Committee ("ALCO") and is committed to ~~notable increases~~prudent 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.

Net interest income for both the quarter and year-to-date periods was impacted by the rapid rise in funding costs, ~~specifically FHLB borrowings. Deposit costs have also begun to increase, but to a lesser extent.~~

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 ~~increased $0.~~6decreased $1.8 million, or ~~7.9%~~12.4%, to ~~$8.5~~$12.5 million for the three months ended September 30, ~~2017~~2023 from ~~$7.9~~$14.3 million for the comparable period of ~~2016. Tax-equivalent~~2022, as interest ~~income~~expense increased ~~$0.8~~by 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, 2017~~third quarter of 2023 from ~~$8.9~~$1.8 million for the same ~~period~~quarter of ~~2016. Partially offsetting the increase in~~2022, while tax-equivalent interest income ~~was an increase in interest expense of $0.2~~increased $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-equivalent~~to $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 13~~contracted 58 basis points to ~~3.27%~~2.85% for the third quarter of ~~2017~~2023 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. Rate~~rate spread, the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities shown on a fully tax-equivalent basis, ~~was 3.18%~~ 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.

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 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 net~~2022. Costs for all major deposit categories increased and resulted in a combined corresponding increase to interest ~~margin and spread~~expense of $5.3 million. Specifically, the average rate paid on interest bearing demand deposits increased 158 basis points to 1.98% for the ~~nine~~third 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 5~~2023 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 ~~period~~quarter 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.

Table of Contents

The ~~$0.~~8$5.5 million, or 34.3%, increase in tax-equivalent interest income comparing the ~~third quarters of 2017~~three months ended September 30, 2023 and ~~2016 was due primarily to~~2022 largely reflected an ~~improvement~~increase in the tax-equivalent yield on average earning assets, ~~of 19~~coupled 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 thousand~~resulted in a corresponding $4.4 million increase to ~~the increase in~~ tax-equivalent interest income. Specifically, the tax-equivalent ~~yields~~yield 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 ~~with~~in 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 improvement~~resulted in corresponding increases in tax-equivalent interest ~~income.~~income of $3.7 million, $512 thousand, and $239 thousand, respectively. Additionally, ~~the~~total 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 ~~balance~~loan 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 for~~comparing the three months ended September 30, ~~2017 from $261.3~~2023, 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 months~~quarter of ~~2016. The~~2022, which caused a corresponding decrease ~~in average borrowed funds led~~ to ~~a decrease in~~tax-equivalent interest ~~expense~~income 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 $1.4~~decreased $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, ~~2017~~2023, from ~~$262.3~~$41.1 million for the ~~same~~comparable period of ~~2016, which resulted~~2022. The decrease in ~~additional~~tax-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, ~~2017~~2023, from ~~$729.7 million for the same nine-month period of 2016.~~

~~The incr~~ease 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, ~~2017~~2022. 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 ~~$111.5~~0.32% 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.

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 ~~reduction in~~corresponding increase of $12.8 million to tax-equivalent interest ~~expense paid~~income. 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 factors~~2023 and 2022, which resulted in ~~a moderate increase~~corresponding increases in ~~the cost~~tax-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, ~~2017~~2023, 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.

Table of Contents

~~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 statements~~the average balances of ~~financial condition~~assets and ~~consolidated statements of~~liabilities, corresponding interest income and expense and resulting average yields or rates paid for the ~~three-~~three and ~~nine-month periods~~nine months ended September 30, ~~2017~~2023 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.

	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)	$	700,729		$	7,266			4.15	%	$	685,038		$	6,751			3.94	%
Loans-tax free (4)		38,109			470			4.93	%		47,620			526			4.42	%
Loans and leases - taxable (4)																			$	1,152,611		$	16,768			5.82	%	$	1,045,474		$	11,870			4.54	%
Loans and leases - tax free (4)																				55,100			577			4.19	%		57,099			506			3.54	%
Total loans (1)(2)		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	%
Securities-taxable		290,348			1,998			2.75	%		260,431			1,650			2.53	%		430,977			3,311			3.07	%		438,339			2,796			2.55	%
Securities-tax free		600			11			7.33	%		905			14			6.19	%		94,276			682			2.89	%		113,629			875			3.08	%
Total securities (1)(5)		290,948			2,009			2.76	%		261,336			1,664			2.55	%		525,253			3,993			3.04	%		551,968			3,671			2.66	%
Interest-bearing deposits in other banks		7,499			24			1.28	%		6,448			8			0.50	%
Interest-bearing deposits in other banks and federal funds sold																				18,874			243			5.15	%		4,634			19			1.64	%
Total earning assets		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	%
Non-earning assets		101,181									107,762									66,986									65,524
Allowance for loan and lease losses		(8,578	)								(8,752	)
Allowance for credit losses																				(13,080	)								(13,677	)
Total assets	$	1,129,888								$	1,099,452								$	1,805,744								$	1,711,022

Liabilities and shareholders' equity
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits	$	489,950			483			0.39	%	$	424,088			244			0.23	%	$	676,034			3,342			1.98	%	$	807,522			802			0.40	%
Savings deposits		102,281			35			0.14	%		99,273			27			0.11	%		134,050			97			0.29	%		146,513			53			0.14	%
Time deposits		200,418			425			0.85	%		214,070			433			0.81	%		346,261			3,007			3.47	%		164,874			146			0.35	%
Total interest-bearing deposits		792,649			943			0.48	%		737,431			704			0.38	%		1,156,345			6,446			2.23	%		1,118,909			1,001			0.36	%

Borrowed funds and other interest-bearing liabilities		73,168			337			1.84	%		103,821			381			1.47	%		215,801			2,664			4.94	%		130,481			835			2.56	%
Total interest-bearing liabilities		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	%
Demand deposits		156,483									152,319									287,846									318,656
Other liabilities		10,325									11,006									22,444									15,742
Shareholders' equity		97,263									94,875									123,308									127,234
Total liabilities and shareholder's equity	$	1,129,888								$	1,099,452								$	1,805,744								$	1,711,022

Net interest income/interest rate spread (6)					8,489			3.18	%					7,864			3.06	%					12,471			2.27	%					14,230			3.28	%
Tax-equivalent adjustment					(164	)								(184	)
Tax equivalent adjustment																							(264	)								(290	)
Net interest income as reported				$	8,325								$	7,680								$	12,207								$	13,940

Net interest margin (7)								3.27	%								3.14	%								2.85	%								3.43	%

	(1)	Interest income is presented on a ~~tax-equivalent~~tax equivalent basis using a ~~34% rate for 2017 and 2016.~~21% rate.
	(2)	Loans and leases are stated net of unearned income.
	(3)	~~Nonaccrual~~Non-accrual loans are included in loans within earning ~~assets~~assets.
	(4)	~~Loan fees included in interest~~Interest income ~~are not significant~~on 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.
	(5)	The yields for securities that are classified as available for sale is based on the average historical amortized cost.
	(6)	Interest rate spread represents the difference between the average yield on interest earning assets and the cost of ~~interest bearing~~interest-bearing liabilities and is presented on a tax equivalent basis.
~~(7)~~	(7)	Net interest income as a percentage of total average interest ~~income as a percentage of total average interest~~ earning assets.

Table of Contents

	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)	$	687,744		$	20,783			4.03	%	$	681,638		$	19,913			3.90	%
Loans-tax free (4)		40,686			1,462			4.79	%		48,060			1,623			4.50	%
Loans and leases - taxable (4)																			$	1,119,522		$	46,324			5.52	%	$	1,005,006		$	32,368			4.29	%
Loans and leases - tax free (4)																				54,775			1,668			4.05	%		52,116			1,397			3.57	%
Total loans (1)(2)		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	%
Securities-taxable		287,639			5,791			2.68	%		261,271			4,944			2.52	%		439,428			9,948			3.02	%		439,765			7,778			2.36	%
Securities-tax free		1,418			64			5.98	%		1,033			45			5.81	%		96,338			2,114			2.93	%		108,926			2,482			3.04	%
Total securities (1)(5)		289,057			5,855			2.70	%		262,304			4,989			2.54	%		535,766			12,062			3.00	%		548,691			10,260			2.49	%
Interest-bearing deposits in other banks		19,781			146			0.98	%		4,189			14			0.45	%
Interest-bearing deposits in other banks and federal funds sold																				18,861			672			4.75	%		8,815			34			0.51	%
Total earning assets		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	%
Non-earning assets		100,422									108,140									67,407									75,066
Allowance for loan and lease losses		(8,526	)								(8,737	)								(12,967	)								(13,316	)
Total assets	$	1,129,164								$	1,095,594								$	1,783,364								$	1,676,378

Liabilities and shareholders' equity
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits	$	492,367			1,248			0.34	%	$	421,040			673			0.21	%	$	691,179			9,555			1.84	%	$	810,220			1,212			0.20	%
Savings deposits		102,447			102			0.13	%		96,340			62			0.09	%		138,088			271			0.26	%		143,649			99			0.09	%
Time deposits		199,897			1,163			0.78	%		212,100			1,274			0.80	%		315,082			7,142			3.02	%		157,000			360			0.31	%
Total interest-bearing deposits		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	%

Borrowed funds and other interest-bearing liabilities		74,588			966			1.73	%		111,451			1,132			1.35	%		205,415			7,543			4.90	%		97,558			1,229			1.68	%
Total interest-bearing liabilities		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	%
Demand deposits		154,828									148,659									286,624									315,699
Other liabilities		10,665									14,012									22,980									14,244
Shareholders' equity		94,372									91,992									123,996									138,008
Total liabilities and shareholder's equity	$	1,129,164								$	1,095,594								$	1,783,364								$	1,676,378

Net interest income/interest rate spread (6)					24,767			3.10	%					23,398			3.05	%					36,215			2.26	%					41,159			3.32	%
Tax-equivalent adjustment					(519	)								(567	)
Tax equivalent adjustment																							(794	)								(814	)
Net interest income as reported				$	24,248								$	22,831								$	35,421								$	40,345

Net interest margin (7)								3.18	%								3.13	%								2.79	%								3.40	%

	(1)	Interest income is presented on a ~~tax-equivalent~~tax equivalent basis using a ~~34% rate for 2017 and 2016.~~21% rate.
	(2)	Loans and leases are stated net of unearned income.
	(3)	~~Nonaccrual~~Non-accrual loans are included in loans within earning ~~assets~~assets.
	(4)	~~Loan~~Interest 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 significant~~of $324 thousand for the nine months ended September 2022.
	(5)	The yields for securities that are classified as available for sale is based on the average historical amortized cost.
	(6)	Interest rate spread represents the difference between the average yield on interest earning assets and the cost of ~~interest bearing~~interest-bearing liabilities and is presented on a tax equivalent basis.
	(7)	Net interest income as a percentage of total average interest earning assets.

Table of Contents

Rate Volume Analysis

The most significant impact on net income between periods is derived from the interaction of changes in the volume and rates earned or paid on interest-earning assets and interest-bearing liabilities. The volume of earning assets, specifically loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in net interest income between periods. Components of interest income and interest expense are presented on a tax-equivalent basis using the ~~statutory~~corporate federal income tax rate of ~~34%~~21%.

The following table summarizes the effect that changes in volumes of earning assets and interest-bearing liabilities and the interest rates earned and paid on these assets and liabilities have on net interest income. The net change or mix component attributable to the combined impact of rate and volume changes has been allocated proportionately to the change due to volume and the change due to rate.

	Three Months Ended 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	$	157		$	358	$	515		$	180		$	690		$	870
Loans - tax free		(112	)		56		(56	)		(260	)		99			(161	)
Loans and leases - taxable																		$	1,308		$	3,590		$	4,898		$	3,988		$	9,968		$	13,956
Loans and leases - tax free																			(18	)		89			71			74			197			271
Total loans		45			414		459			(80	)		789			709			1,290			3,679			4,969			4,062			10,165			14,227
Securities - taxable		199			149		348			518			329			847			(48	)		563			515			(6	)		2,176			2,170
Securities - tax free		(5	)		2		(3	)		17			2			19			(142	)		(51	)		(193	)		(278	)		(90	)		(368	)
Total securities		194			151		345			535			331			866			(190	)		512			322			(284	)		2,086			1,802
Interest-bearing deposits in other banks		1			15		16			100			32			132
Interest-bearing deposits in other banks and federal funds sold																			(15	)		239			224			78			560			638
Total interest income		240			580		820			555			1,152			1,707			1,085			4,430			5,515			3,856			12,811			16,667

Interest expense:
Interest-bearing demand deposits		43			196		239			129			446			575			(151	)		2,691			2,540			(204	)		8,547			8,343
Savings deposits		1			7		8			4			36			40			(5	)		49			44			(4	)		176			172
Time deposits		(28	)		20		(8	)		(72	)		(39	)		(111	)		318			2,543			2,861			690			6,092			6,782
Total interest-bearing deposits		16			223		239			61			443			504			162			5,283			5,445			482			14,815			15,297
Borrowed funds and other interest-bearing liabilities		(128	)		84		(44	)		(431	)		265			(166	)		756			1,073			1,829			2,311			4,003			6,314
Total interest expense		(112	)		307		195			(370	)		708			338			918			6,356			7,274			2,793			18,818			21,611
Net interest income	$	352		$	273	$	625		$	925		$	444		$	1,369		$	167		$	(1,926	)	$	(1,759	)	$	1,063		$	(6,007	)	$	(4,944	)

Provision for ~~Loan~~Credit Losses - Loans and ~~Lease Losses~~Leases

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 ~~ALLL~~ACL by considering the underlying financial performance of the borrower, collateral values and associated credit risks. Future material adjustments may be necessary to the provision for ~~loan and lease~~credit losses and the ~~ALLL~~ACL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ~~ALLL. The provision for loan~~ACL. 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. A~~adjust credit ~~to loan and lease losses reflects the reversal of amounts previously charged to the ALLL.~~

provisioning as appropriate. FNCB recorded a credit to the provision for ~~loan and lease~~credit 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 a~~2022. The provision for credit losses totaled $1.5 million for ~~loan and lease losses~~the 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 reflected~~2022. 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-interest Income

~~Non-interest~~For the three months ended September 30, 2023, non-interest income ~~totaled $1.7~~decreased $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 of~~equity securities, ~~of $367 thousand, other income of $28 thousand, and loan-related fees of $11 thousand. Those increases were partially offset by~~coupled with decreases in net gains on the sale of mortgage loans held for sale and other ~~real estate owned~~non-interest income. Stock volatility in the financial sector continued into the third quarter of ~~$32~~2023. As result, FNCB recognized net losses on equity securities of $233 thousand ~~net~~for 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 guaranteed~~mortgage loans held for sale in the third quarter of ~~$28~~2023 totaled $1 thousand, ~~and deposit service charges~~compared 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.

Table of Contents

For the nine months ended September 30, ~~2017,~~2023, non-interest income ~~totaled $5.3~~decreased $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.

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 ~~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 with~~2022, 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 2017~~legal, 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 Expense~~

~~For 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, coupled~~the 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%, comparing~~bank shares tax expense. For the nine months ended September 30, ~~2017 and 2016. Positive fluctuations within non-interest expense include~~2023, FNCB recorded a ~~decrease in salaries and employee benefits~~credit 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% due~~38.0%, 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.

Provision for Income Taxes

FNCB recorded ~~a provision for~~ income tax expense of ~~$2.5~~$2.3 million for the nine months ended September 30, ~~2017, an increase~~2023, 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 months~~period of ~~2016.~~

~~Management evaluates the carrying amount of its deferred~~2022. 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 guidance~~rate 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 r~~ecoup 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 assets~~19.13% at September 30, ~~2017 taking into consideration both positive~~2023, compared to 17.38% for the same period of 2022. The increase in income tax expense and ~~negative evidence as of that date. Based~~the 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 earnings~~equity securities recorded in ~~2016 and~~ the first nine months of ~~2017 were strong, and management believes projected future core earnings will continue~~2023, compared to ~~support~~ the ~~recognition~~same 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.~~

Table of Contents

FINANCIAL CONDITION

Assets

Total assets ~~decreased $38.5~~increased $81.2 million, or ~~3.2%~~4.7%, to ~~$1.157~~$1.827 billion at September 30, ~~2017~~2023 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%, reduction~~reflected increases in loans and leases and cash and cash equivalents, ~~which largely reflected~~partially offset by a decrease in ~~total deposits~~available-for-sale debt securities, as security repayments were used to fund loan originations. Loans and leases, net of ~~$31.9~~the ACL, increased $83.5 million, or ~~3.2%~~7.5%, ~~coupled with~~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 ~~repayment of~~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 ~~$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 in~~2.4%, 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.

Cash and Cash Equivalents

Cash and cash equivalents ~~declined $68.6~~increased $35.2 million, or ~~61.0%~~83.9%, to ~~$43.8~~$77.1 millionat September 30, ~~2017~~2023 from ~~$112.4~~$41.9 million at December 31, ~~2016.~~2022. The ~~significant reduction was due~~increase 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 ~~dividends~~available-for-sale debt securities of ~~$0.02~~$27.9 million and ~~$0.06~~a 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 periods~~FNCB'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.

Securities

~~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 investment~~Debt securities are classified as either held-to-maturity or available-for-sale at the time of purchase based on ~~its~~management's intent. Held-to-maturity securities are carried at amortized cost, while available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a component of shareholders’ equity in accumulated other comprehensive income (loss), net of tax. At September 30, ~~2017~~2023 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.~~

At September 30, ~~2017, the~~2023, 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, and~~floating-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.

Table of Contents

The ~~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-sale~~fixed-rate securities ~~which~~fluctuates 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 and~~2023, 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:~~

~~Composition~~2022. Any further increase in interest rates could result in further depreciation in the fair value of ~~the Investment Portfolio~~

September 30,

December 31,

(in thousands)

2017

2016

Available-for-sale securities

Obligations of U.S. government agencies
$ - $ 12,188
Obligations of state and political subdivisions
144,700 117,873
U.S. government/government-sponsored agencies:

Collateralized mortgage obligations - residential
35,272 18,084
Collateralized mortgage obligations - commerical
66,459 99,350
Mortgage-backed securities
22,522 20,576
Corporate debt securities
5,445 3,792
Asset-backed securities
3,512 -
Negotiable certificates of deposit
3,192 3,216
Equity securities
935 936
Total
$ 282,037 $ 276,015

~~Management monitors the investment~~FNCB's securities portfolio ~~regularly~~ and ~~adjusts the investment strategy to reflect~~capital 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. Because~~the 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 agency~~does 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.

The following table presents the ~~maturities~~composition of available-for-sale debt securities ~~based on carrying value~~ at September 30, ~~2017~~2023 and December 31, 2022:

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	$	31,943		7.31	%	$	32,134		6.75	%
Obligations of state and political subdivisions		190,339		43.54	%		220,782		46.37	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		73,291		16.77	%		80,407		16.89	%
Collateralized mortgage obligations - commercial		3,305		0.75	%		3,329		0.70	%
Mortgage-backed securities		16,131		3.69	%		20,663		4.34	%
Private collateralized mortgage obligations		69,933		16.00	%		72,507		15.23	%
Corporate debt securities		30,678		7.02	%		30,672		6.44	%
Asset-backed securities		20,864		4.77	%		14,941		3.14	%
Negotiable certificates of deposit		658		0.15	%		656		0.14	%
Total available-for-sale debt securities	$	437,142		100.00	%	$	476,091		100.00	%

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 ~~such~~available-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 interest~~the federal corporate income tax rate of ~~34.0%~~21.0%. Because residential, commercial and ~~commercial~~private collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary.

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Maturity Distribution of ~~the Investment Portfolio~~Available-for-Sale Debt Securities

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
- 26,423 118,277 - - - 144,700
Yield
2.48 % 2.81 % 2.75 %
U.S. government/government-sponsored agencies:

Collateralized mortgage obligations - residential
- - - - 35,272 - 35,271
Yield
2.80 % 2.80 %
Collateralized mortgage obligations - commercial
- - - - 66,459 - 66,459
Yield
2.49 % 2.49 %
Mortgage-backed securities
- - - - 22,522 - 22,522
Yield
2.86 % 2.86 %
Corporate debt securities
- - 4,100 1,345 - - 5,445
Yield
6.63 % 9.50 % 7.20 %
Asset-backed securities
- - - - 3,512 - 3,512
Yield
2.45 % 2.45 %
Negotiable certificates of deposit
248 2,944 - - - - 3,192
Yield
1.45 % 2.09 % 2.04 %
Equity securities
- - - - - 935 935
Yield
3.45 % 3.45 %
Total available-for-sale maturities
$ 248 $ 29,367 $ 122,377 $ 1,345 $ 127,765 $ 935 $ 282,037
Weighted average yield
1.45 % 2.44 % 2.94 % 9.50 % 2.64 % 3.45 % 2.78 %

	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		-			1.17	%		-			-			-			1.17	%
Obligations of state and political subdivisions		2.97	%		2.97	%		2.28	%		2.37	%		-			2.50	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		-			-			-			-			2.55	%		2.55	%
Collateralized mortgage obligations - commercial		-			-			-			-			1.99	%		1.99	%
Mortgage-backed securities		-			-			-			-			2.71	%		2.71	%
Private collateralized mortgage obligations		-			-			-			-			3.89	%		3.89	%
Corporate debt securities		-			8.50	%		4.61	%		-			-			4.77	%
Asset-backed securities		-			-			-			-			6.96	%		6.96	%
Negotiable certificates of deposit		-			1.02	%		-			-			-			1.02	%
Weighted average yield		2.97	%		2.25	%		3.31	%		2.37	%		3.49	%		2.97	%

~~OTTI~~ Evaluation for Credit Impairment

~~There~~Management performed a review of all securities in an unrealized loss position as of September 30, 2023 and noted that there was no ~~OTTI recognized during~~material change in the ~~nine months ended~~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~~2023. 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 securities~~issuers. Accordingly, management determined that FNCB was not required to establish an ACL for ~~OTTI, see~~any security in an unrealized loss position at September 30, 2023.

See Note 3, ~~“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.

~~Investment~~Loans and Leases

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 ~~FHLB~~ the following narrative analysis.

Total loans and leases, net of ~~Pittsburgh stock has limited marketability~~deferred fees and ~~is carried at cost. FNCB’s investment in FHLB of Pittsburgh stock totaled $2.5~~costs and unearned income, increased $81.4 million, ~~and $3.3 million~~or 7.2%, to $1.206 billion at September 30, ~~2017 and~~2023 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 stock~~loan 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.

~~Loans~~

~~For 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 ~~political~~municipal subdivision ~~segments, resulting~~loans 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. Commercial~~the 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. Contributing~~declined 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 si~~gnificant 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, a~~The 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, ~~2017~~2023 from ~~$430.1~~$692.6 million at December 31, ~~2016. The~~2022. Despite the increase, ~~was attributable to both~~ the ~~residential and commercial~~ratio of real ~~estate segments, as detailed above. Real~~ estate secured loans ~~as a percentage~~to total loans and leases decreased to 57.9% of total ~~gross~~ loans ~~increase to 60.2%~~ at September 30, ~~2017 as~~2023 compared to ~~59.0% as of~~61.6% at December 31, ~~2016.~~2022, which reflected strong demand for commercial equipment financing.

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 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 loans~~leases, 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 $10.0~~Commercial and industrial loansand leasesincreased $76.3 million, or ~~4.1%~~28.0%, to ~~$253.8~~$348.7 million at September 30, ~~2017~~2023 from ~~$243.8~~$272.4 million at December 31, ~~2016. Commercial real estate~~2022, 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, ~~2017~~2023 from ~~$18.4~~$66.2 million at December 31, ~~2016, as several large commercial projects were started, and existing projects approach completion.~~2022.

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Residential ~~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 ~~offers~~established 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 ~~14.5~~19.5 years ~~and offers~~that 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.

Consumer loans ~~grew throughout the first nine months of 2017, increasing $10.9~~primarily 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, ~~2017~~2023 from ~~$127.8~~$94.5 million at December 31, ~~2016.~~ ~~The increase was attributable~~2022, largely due to the ~~purchase~~run-off of ~~a pool of refinanced student loans of $5.0 million, in addition to seasonal increases within~~ the indirect ~~auto lending~~loan portfolio. Loans and leases to state and ~~municipal governments decreased $4.4~~political subdivisions increased $6.4 million, or ~~10.2%~~9.9%, to ~~$39.3~~$71.2 million at September 30, ~~2017~~2023 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~~

September 30,

December 31,

(in thousands)

2017

2016

Residential real estate
$ 152,257 $ 144,260
Commercial real estate
253,791 243,830
Construction, land acquisition and development
26,805 18,357
Commercial and industrial
146,048 150,758
Consumer
138,734 127,844
State and political subdivisions
39,271 43,709
Total loans, gross
756,906 728,758
Unearned income
(84 ) (48 )
Net deferred loan costs
2,667 2,569
Allowance for loan and lease losses
(8,862 ) (8,419 )
Loans, net
$ 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.

The following table presents ~~industry concentrations within~~ ~~FNCB’s loan portfolio~~loans and leases receivable, net by segment at September 30, ~~2017~~2023 and December 31, ~~2016:~~2022:

Loan ~~Concentrations~~and Lease Portfolio Detail

September 30, 2017

December 31, 2016

(dollars in thousands)

Amount

% of Gross
Loans

Amount

% of Gross
Loans

Retail space/shopping centers
$ 43,772 5.78 % $ 38,573 5.29 %
1-4 family residential investment properties
30,669 4.05 % 24,413 3.35 %
Automobile dealers
20,185 2.67 % 31,989 4.39 %

	September 30, 2023						December 31, 2022
(dollars in thousands)	Amount			% of Total Loans, Gross			Amount			% of Total Loans, Gross
Residential real estate	$	244,762			20.30	%	$	250,221			22.28	%
Commercial real estate		379,663			31.49	%		376,976			33.56	%
Construction, land acquisition and development		73,265			6.08	%		66,555			5.92	%
Commercial and industrial		348,749			28.92	%		272,024			24.22	%
Consumer		88,084			7.30	%		92,612			8.24	%
State and political subdivisions		71,229			5.91	%		64,955			5.78	%
Total loans and leases (1)		1,205,752			100.00	%		1,123,343			100.00	%
Unearned income		-						(810	)
Net deferred origination fees		-						1,784
Allowance for credit losses		(12,149	)					(14,193	)
Loans and leases, net	$	1,193,603					$	1,110,124
(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 ~~ALLL.~~ACL. The ~~ALLL~~ACL is established through a provision for ~~loan and lease~~credit losses charged to earnings.

FNCB has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of the Chief 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 ~~the ALLL committees,~~Directors Loan Committees, as well as through oversight ~~from~~of 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.

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 ~~finance,~~fromfinance, legal, ~~retail~~ lending and credit administration, ~~meets~~meet monthly or more often as necessary to review individual problem credits and workout strategies and provides monthly reports to the Board of Directors.

~~A loan is considered impaired when it is probable that~~ FNCB will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the note and loan agreement. For purposes of the analysis, all TDRs, loan relationships with an aggregate outstanding balance greater than $100 thousand rated substandard and non-accrual, and loans that are identified as doubtful or loss are considered impaired. Impaired loans are analyzed individually to determine the amount of impairment. For collateral-dependent loans, impairment is measured based on the fair value of the collateral supporting the loans. A loan is 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.

Non-performing loans are monitored on an ongoing basis as part of FNCB’s loan review process. Additionally, work-out ~~efforts~~ for non-performing loans and ~~OREO~~other 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.

Management actively manages ~~impaired~~ loans rated special mention and substandard in an effort to ~~reduce loan balances~~mitigate loss to FNCB by working with customers to develop strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means. ~~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.

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The following ~~schedule~~table presents information about non-performing assets ~~and accruing TDRs~~ at September 30, ~~2017~~2023 and December 31, ~~2016:~~2022:

Non-performing Assets ~~and~~ ~~Accruing TDRs~~

	September 30,			December 31,			September 30,			December 31,
(in thousands)	2017			2016
(dollars in thousands)							2023			2022
Non-accrual loans	$	2,642		$	2,234		$	5,084		$	2,763
Loans past due 90 days or more and still accruing		-			-			59			79
Total non-performing loans		2,642			2,234			5,143			2,842
Other real estate owned		1,088			2,048
Other non-performing assets		1,900			2,160			1,647			1,773
Total non-performing assets	$	5,630		$	6,442		$	6,790		$	4,615

Accruing TDRs	$	9,283		$	4,176
Non-performing loans as a percentage of gross loans		0.35	%		0.31	%
Non-performing loans as a percentage of total loans								0.43	%		0.25	%
Non-performing assets as a percentage of total assets								0.37	%		0.26	%
Allowance for credit losses as a percentage of total loans and lease, net								1.01	%		1.26	%
Allowance for credit losses to non-accrual loans and leases								238.97	%		513.68	%
Allowance for credit losses to non-performing loans and leases								236.22	%		499.40	%
Allowance for credit losses to non-performing assets								178.92	%		307.54	%

~~Tota~~lTotal non-performing assets ~~decreased $0.8~~increased $2.2 million, or ~~12.6%~~47.1%, to ~~$5.6~~$6.8 million at September 30, ~~2017~~2023 from ~~$6.4~~$4.6 million at December 31, ~~2016.~~2022. The ~~decrease was primarily due to~~increase reflected an increase in non-performing loans, partially offset by a ~~decrease~~reduction in other ~~real estate owned of $1.0~~non-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 $0.4~~81.0%, to $5.1 million ~~primarily attributable to one large commercial relationship, which was also modified as a TDR during the nine months ended~~at 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, ~~2017~~2023 from ~~0.31%~~0.25% at December 31, ~~2016. FNCB’s ratio~~2022. 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 improved~~total 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 continues~~2022. 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 basis~~leases, 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.

Other non-performing assets at ~~September 30, 2017 and December 31, 2016 include~~was 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 arose~~2011 as part of a settlement agreement for a large construction, land acquisition and development loan for a residential development project in the Pocono region of Monroe County, ~~and has been included~~Pennsylvania. 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 and~~noted an increase in construction activity related to this project byincluding the ~~developer has increased. Management has classified this asset as substandard due to the length~~construction of ~~holding time~~additional 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 sold~~a pool/spa building. Accordingly, FNCB anticipates receiving additional payments during the ~~nine months ended September 30, 2017, resulting in a net gain~~remainder of ~~$47 thousand that was included in non-interest income within the consolidated statements of income.~~2023.

~~TDRs at~~ ~~September 30, 2017~~While 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 million~~the 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.

The following table presents the changes in non-performing loans for thethree and nine months ended September 30, ~~2017~~2023 and ~~2016. Loan foreclosures represent recorded investment at time of foreclosure not including the effect of any guarantees:~~2022.

Changes in ~~Non-performing~~Non-Performing Loans

	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	$	3,681		$	2,739		$	2,234		$	3,788		$	3,760		$	2,778		$	2,842		$	3,863
Loans newly placed on non-accrual		404			1,126			3,273			3,364			2,371			658			5,431			1,356
Changes in loans past due 90 days or more and still accruing		-			-			-			-
Loans transferred to OREO		-			(940	)		(80	)		(1,177	)
Loans returned to performing status		(109	)		(3	)		(180	)		(147	)
Change in loans past due 90 days or more and still accruing														10			60			(20	)		74
Loans charged-off		(363	)		(171	)		(1,104	)		(1,991	)		(793	)		(394	)		(2,065	)		(760	)
Loans sold														-			-			-			(925	)
Loan payments received		(971	)		(335	)		(1,501	)		(1,421	)		(205	)		(374	)		(1,045	)		(880	)
Balance, end of period	$	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.

Table of Contents

The following table ~~outlines~~presents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at September 30, ~~2017~~2023 and December 31, ~~2016:~~2022:

Loan Delinquencies and ~~Non-~~A~~ccrual~~Non-Accrual Loans

September 30,

December 31,

2017

2016

Accruing:

30-59 days
0.28 % 0.37 %
60-89 days
0.18 % 0.13 %
90+ days
0.00 % 0.00 %
Non-accrual
0.35 % 0.31 %
Total delinquencies
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.

	September 30,			December 31,
	2023			2022
Accruing:
30-89 days		0.30	%		0.19	%
90+ days		0.00	%		0.01	%
Non-accrual		0.42	%		0.25	%
Total delinquencies		0.72	%		0.45	%

Allowance for ~~Loan and Lease~~Credit Losses

The ~~ALLL represents management~~’s estimate of probable loan losses inherent in the loan portfolio. The ALLL is analyzed in accordance with GAAP and is maintained at a level that is based on management’s evaluation of the adequacy of the ALLL in relation to the risks inherent in the loan portfolio.

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

~~changes in national, local, and business economic conditions and developments, including the condition of various market segments;~~

~~changes in the nature and volume of the loan portfolio;~~

~~changes in lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices and results;~~

~~changes in the experience, ability and depth of lending management and staff;~~

~~changes in the quality of the loan review system and the degree of oversight by the Board of Directors;~~

~~changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual loans, TDRs and other loan modifications;~~

~~the existence and effect of any concentrations of credit and changes in the level of such concentrations;~~

~~the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portfolio; and~~

~~analysis of customers’ credit quality, including knowledge of their operating environment and financial condition.~~

Evaluations are intrinsically subjective, as the results are estimated based on management knowledge and experience and are subject to interpretation and modification as information becomes available or as future events occur. Management monitors the loan portfolio on an ongoing basis with emphasis on weakness in both the real estate market and the economy in general and its effect on repayment. Adjustments to the ALLL are made based on management~~’s assessment of the factors noted above.~~

~~For purposes of~~ management’s analysis of the ALLL, all loan relationships with an aggregate balance greater than $100 thousand that are rated substandard and non-accrual, identified as doubtful or loss, and all TDRs are considered impaired and are analyzed individually to determine the amount of impairment. Circumstances such as construction delays, declining real estate values, and the inability of the borrowers to make scheduled payments have resulted in these loan relationships being classified as impaired. FNCB utilizes the fair value of collateral method for collateral-dependent loans and TDRs for which repayment depends on the sale of collateral. For non-collateral-dependent loans and TDRs, FNCB measures impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. 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 ALLL~~ACL equaled ~~$8.~~9$12.2 million at September 30, ~~2017, an increase of $0.5 million from $8.4~~2023, compared to $14.2 million at December 31, ~~2016.~~2022. The ~~increase~~decrease 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 lease~~credit 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 ~~ALLL~~ACL 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 and~~2023 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.

The following table presents an allocation of the ~~ALLL~~ACL by major loan category and percent of loans in each category to total loans at September 30, ~~2017~~2023 and December 31, ~~2016:~~2022:

Allocation of the ~~ALLL~~ACL

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
$ 1,178 20.12 % $ 1,171 19.79 %
Commercial real estate
3,303 33.53 % 3,297 33.46 %
Construction, land acquisition and development
277 3.54 % 268 2.52 %
Commercial and industrial
2,363 19.30 % 1,736 20.69 %
Consumer
1,433 18.32 % 1,457 17.54 %
State and political subdivision
308 5.19 % 490 6.00 %
Total
$ 8,862 100.00 % $ 8,419 100.00 %

	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	$	1,217		20.30	%	$	2,215		22.28	%
Commercial real estate		2,703		31.49	%		4,193		33.55	%
Construction, land acquisition and development		1,341		6.08	%		747		5.92	%
Commercial and industrial		5,164		28.92	%		4,099		24.22	%
Consumer		1,331		7.30	%		1,307		8.25	%
State and political subdivisions		393		5.91	%		503		5.78	%
Unallocated		-		-			1,129		-
Total	$	12,149		100.00	%	$	14,193		100.00	%

The following table presents an analysis of the ~~ALLL~~ACL by loan category for the three and nine months ended September 30, ~~2017~~2023 and ~~2016:~~2022:

Reconciliationof the ~~ALLL~~ACL

	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	$	8,469		$	8,559		$	8,419		$	8,790		$	12,873		$	13,381		$	14,193		$	12,416
Impact of ASU 2016-13														-			-			(2,636	)		-
Charge-offs:
Residential real estate		32			37			112			61			-			-			5			3
Commercial real estate		85			-			114			251			-			-			-			-
Construction, land acquisition and development		-			-			-			-			-			-			-			-
Commercial and industrial		128			18			475			1,082			344			17			436			49
Consumer		132			134			438			652			474			394			1,706			757
State and political subdivisions		-			-			-			-			-			-			-			-
Total charge-offs		377			189			1,139			2,046			818			411			2,147			809
Recoveries of charged-off loans:
Residential real estate		16			2			28			4			-			3			-			3
Commercial real estate		38			1			43			4			67			18			172			242
Construction, land acquisition and development		-			-			421			9			-			11			-			11
Commercial and industrial		125			184			304			396			7			12			30			23
Consumer		48			167			300			475			290			292			1,033			599
State and political subdivisions		-			-			-			-			-			-			-			-
Total recoveries		227			354			1,096			888			364			336			1,235			878
Net charge-offs (recoveries)		150			(165	)		43			1,158			454			75			912			(69	)
Provision (credit) for loan and lease losses		543			(234	)		486			858
Provision for credit losses														(270	)		513			1,504			1,334
Balance at end of period	$	8,862		$	8,490		$	8,862		$	8,490		$	12,149		$	13,819		$	12,149		$	13,819

Net charge-offs (recoveries) as a percentage of average loans		0.02	%		(0.02	%)		0.01	%		0.16	%

Allowance for loan and lease losses as a percentage of gross loans at period end		1.17	%		1.17	%		1.17	%		1.17	%
Net charge-offs (recoveries) as a percentage of average loans and leases (annualized)														0.15	%		0.03	%		0.10	%		(0.01	)%

Table of Contents

~~Other Real Estate Owned~~Liabilities

At 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 properties~~2023 from $1.627 billion at December 31, 2022. The increase was due primarily to deposit growth, coupled with an ~~aggregate carrying value~~increase 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 ~~decrease~~modest 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 ~~$0.9~~certificate 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 properties~~utilized 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.

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 ~~carrying value of $125 thousand during~~per share basis, dividends declared totaled $0.270 per share for the nine months ended September 30, ~~2017. There was one sale and one partial sale~~2023, 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 in~~2022. On October 25, 2023, FNCB's Board of Directors declared a ~~net gain~~dividend 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 variety~~fourth 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.

The ~~following table presents the activity in OREO~~ ~~for the three and nine months ended September 30, 2017 and 2016:~~

~~Activity in OREO~~

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

2017

2016

2017

2016

Balance, beginning of period
$ 1,183 $ 1,628 $ 2,048 $ 3,154
Property foreclosures
- 713 125 950
Valuation adjustments
(82 ) (31 ) (322 ) (169 )
Carrying value of OREO sold
(13 ) (245 ) (763 ) (1,870 )
Balance, end of period
$ 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~~

September 30,

December 31,

(in thousands)

2017

2016

Land / lots
$ 524 $ 641
Commercial real estate
427 1,380
Residential real estate
137 27
Total other real estate owned
$ 1,088 $ 2,048

~~Liabilities~~

~~Total liabilities were $1.060 billion at September 30, 2017, a decrease of $45.6~~Bank'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, ~~2017~~2023 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 million~~respectively, at September 30, ~~2017 from $173.7 million~~2023, compared to 13.11% and 8.77%, respectively, at December 31, ~~2016.~~2022. The ~~decrease in interest-bearing deposits primarily reflected~~Bank'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 million~~minimum regulatory capital ratios required for well capitalized under prompt corrective action regulations. Based on the ~~subordinated notes (“Notes”). This principal repayment~~most 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.~~

~~Equity~~

~~Total shareholders’ equity increased $7.1 million, or 7.9%, to $97.5 million~~considered well capitalized at September 30, ~~2017 from $90.4 million at~~2023 and December 31, ~~2016. The~~2022. 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.

Liquidity

The term liquidity refers to the ability to generate ~~sufficient~~sufficient amounts of cash to meet cash flow needs. Liquidity is required to fulfill the borrowing needs of FNCB’s credit customers and the withdrawal and maturity requirements of its deposit customers, as well as to meet other financial commitments. FNCB’s liquidity position is impacted by several factors, which include, among others, loan origination volumes, loan and investment maturity structure and cash flows, deposit demand and ~~certificate of~~time deposit maturity structure and retention. FNCB has liquidity and contingent funding policies in place that are designed with controls in place to provide advanced detection of potentially significant funding shortfalls, establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate a potential liquidity crisis. Management monitors FNCB’s liquidity position and fluctuations daily, forecasts future liquidity needs, performs periodic stress tests on its liquidity levels and develops strategies to ensure adequate liquidity at all ~~times.~~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.

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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, ~~2017,~~2023, cash and cash equivalents totaled ~~$43.8~~$77.1 million, ~~a decrease~~an increase of ~~$68.6~~$35.2 million compared to ~~$112.4~~$41.9 million at December 31, ~~2016. Net funds~~2022, 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 ~~$51.2~~partially 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. Investing~~lending activities used ~~$24.9~~$82.9 million in net cash ~~for~~and $15.0 million was utilized in the ~~nine months ended~~purchase 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.

Management is actively monitoring FNCB's liquidity position and capital adequacy in light of the changing circumstances related to economic uncertainty, several recent bank failures, liquidity constraints, current inflation levels, rising interest rates and increased competition. Management believes FNCB's current liquidity position and available sources of liquidity were sufficient to meet its cash flow needs and fulfill its obligations at September 30, ~~2017, driven primarily by a net~~2023. 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 ~~loans~~the 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 ~~customers~~funding and cash flow needs and evaluates potential sources of ~~$30.1 million. Net cash provided by operating activities totaled $7.4 million.~~additional liquidity.

Impact of Inflation and Changing Prices

~~Interest~~The 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 ~~Risk~~Risk” 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.

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.

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Asset and Liability Management

~~FNCB~~ ~~manages these objectives through its Asset and Liability Management Committee (“ALCO”) and its Rate and Liquidity and Investment Committees, which consist~~The 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 committees~~ALCO meet ~~regularly~~quarterly, or more frequently as necessary, to develop balance sheet strategies affecting the future level of net interest income, liquidity and capital. The major objectives of ALCO are to:

The major objectives of ALCO are to:

●

manage exposure to changes in the interest rate environment by limiting the changes in net interest margin to an acceptable level within a reasonable range of interest rates;

●

~~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 liquidity~~maintain a strong capital base; and ~~funding;~~

●

~~maintain a strong capital base; and~~

●maximize net interest income opportunities.

~~maximize net interest income opportunities.~~

FNCB utilizes the pricing and structure of loans and deposits, the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, and 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, ~~our~~FNCB's liquidity position, the economic environment, anticipated direction of interest rates and FNCB’s earnings sensitivity to changes in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable negative changes in net interest income. Furthermore, as part of its ongoing monitoring, ALCO ~~has been enhanced to require periodic~~requires quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques.

Earnings at Risk and Economic Value at Risk Simulations

Earnings at Risk

Earnings-at-risk simulation measures the change in net interest income and net income under various interest rate scenarios. Specifically, given the current market rates, ALCO looks at “earnings at risk” to determine anticipated changes in net interest income from a base case scenario with scenarios of +200, +400, and ~~-100~~-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).

Economic Value at Risk

While earnings-at-risk simulation measures the short-term risk in the balance sheet, economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from FNCB’s existing assets and liabilities. ALCO examines this ratio regularly, and given the current rate environment, has utilized rate shocks of +200, +400, and ~~-100~~-200 basis points for simulation purposes. Management recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.

While ALCO regularly performs a wide variety of simulations under various strategic balance sheet and treasury yield curve scenarios, the following results reflect FNCB’s sensitivity over the subsequent twelve months based on the following assumptions:

●

a~~sset~~asset and liability levels using September 30, ~~2017~~2023 as a starting point;

●

c~~ash~~cash 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.

The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points, +200 basis points, and ~~-100~~-200 basis points on net interest income and the change in economic value over a one-year time horizon from the September 30, ~~2017~~2023 levels:

	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		(0.8%	)		(10.0%	)		(3.5%	)		(20.0%	)		(4.1%	)		(5.0%	)		(5.1	)%		(12.5	)%		(8.6	)%		(20.0	)%		(0.4	)%		(12.5	)%

Economic value at risk:
Percent change in economic value of equity		(3.3%	)		(20.0%	)		(7.5%	)		(35.0%	)		(7.4%	)		(10.0%	)		(5.0	)%		(20.0	)%		(10.7	)%		(35.0	)%		1.0	%		(20.0	)%

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~~FNCB was liability rate sensitive~~Model 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, due~~2023 indicated that FNCB exhibited moderate interest sensitivity to ~~a significant amount of non-maturity, interest-bearing deposit balances at~~changes in interest rates over the ~~end of~~next twelve months. According to the ~~period. Accordingly,~~ model results at September 30, ~~2017 indicate that FNCB’s~~2023, in comparison to the base case, net interest income ~~and economic value of equity are~~is expected to decrease ~~0.8% and 3.3%, respectively,~~5.1% under a +200-basis point interest rate shock. ~~Due~~Additionally, under a parallel shift in interest rates of +200 basis points, FNCB's economic value of equity ("EVE") is expected to ~~significant earning asset growth~~decrease 5.0%. FNCB's interest sensitivity improved in the ~~third quarter of 2017,~~rates down scenario but increased moderately in the ~~results of the simulation~~rates up scenarios as compared to model ~~at September 30, 2017 improved in comparison to the~~ results at June 30, ~~2017 which~~2023. 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 value~~EVE for the next twelve-month horizon are within internal ALCO policy guidelines.

Despite FOMC actions, inflation, while improving, has remained elevated in during the first nine months of ~~equity were expected to decrease 2.8% and 4.7%, respectively, given a +200-basis~~2023. The FOMC continued its tightening stance with four additional 25-basis point rate ~~shock.~~

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 ~~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.

As previously mentioned, as part of its ~~ongoing~~ongoing monitoring, ALCO requires ~~periodic~~quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques. As part of its quarterly review, management compared tax-equivalent net interest income recorded for the three months ended September 30, ~~2017~~2023 with tax-equivalent net interest income that was projected for the same three-month period. ~~The~~There was a negative variance between actual and projected tax-equivalent net interest income for the three-month period ended September 30, ~~2017 was $207~~2023 of approximately $376 thousand, or ~~2.3%~~3.0%. ~~Although the~~The 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.

Off-Balance Sheet Arrangements

In the ~~normal~~ordinary course of operations, FNCB engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions may be used for general corporate purposes or for customer needs. Corporate purpose transactions would be used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding.

For the ~~three-~~three and ~~nine-month periods~~nine 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.

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in FNCB’s exposure to market risk during the ~~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.

Item 4 — Controls and Procedures

~~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.

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.

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PART II Other Information

Item 1 — Legal Proceedings.

On May 24, 2012, a putative shareholder filed a complaint in the Court of Common Pleas for Lackawanna County (“Shareholder Derivative Suit”) against certain present and former directors and officers of FNCB (the “Individual Defendants”) alleging, inter alia, breach of fiduciary duty, abuse of control, corporate waste, and unjust enrichment. FNCB was named as a nominal defendant. 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 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.

FNCB has been subject to tax audits,, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims, workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of FNCB.

There have been no changes in the status of the other litigation, if any, disclosed in FNCB’s 2022 Annual Report.

Item 1A — Risk Factors.

~~Management~~In 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.

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 ~~does~~announced 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 material~~know 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 ~~risk~~companies’ 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 for~~are beyond the ~~year ending December 31, 2016.~~control of PFIS and 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.

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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 and Use of Proceeds.

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 3~~ ~~– Defaults upon Senior Securities.~~

~~None.~~

Item 4 –— Mine Safety Disclosures.

Not ~~applicable~~.applicable.

Item 5 –- Other Information.

(a) None.

(b) None.

Table of Contents

Item 6 – — Exhibits.

The following exhibits are filed or furnished herewith or incorporated by reference.

EXHIBIT 2.1
~~EXHIBIT~~ ~~3.1~~	~~Amended~~Agreement and ~~Restated Articles~~Plan of ~~Incorporation~~Merger, dated ~~October 4, 2016 —~~as of September 27, 2023, by and between Peoples Financial Services Corp. and FNCB Bancorp, Inc. – filed as Exhibit ~~3.1~~2.1 to FNCB’s Current Report on Form 8-K on September 28, 2023, is hereby incorporated by reference. ±

EXHIBIT 3.1	Amended and Restated Articles of Incorporation of FNCB Bancorp, Inc. dated May 19, 2010 - filed as Exhibit 3.1 to FNCB's Current Report on Form 8-K on May 19, 2010, is hereby incorporated by reference.

EXHIBIT 3.2	Articles of Amendment to the Amended and Restated Articles of Incorporation dated October ~~11,~~4, 2016 - filed as Exhibit 3.1 to FNCB's Current Report on Form 8-K on October 4, 2016, is hereby incorporated by reference.

EXHIBIT 3.3	Amended and Restated Bylaws filed as Exhibit 3.3 to FNCB's Form 10-K for the year ended December 31, 2022, as filed on March 10, 2023, is hereby incorporated ~~herein~~ by ~~this~~ reference.

EXHIBIT 10.1	Amendment to Employment Agreement, dated as of September 27, 2023, by and among FNCB Bancorp, Inc., FNCB Bank, and James M. Bone, Jr., CPA - filed as Exhibit 10.1 to FNCB's Current Report on Form 8-K on September 28, 2023, is hereby incorporated by reference.

EXHIBIT ~~3.2~~	~~Amended and Restated Bylaws~~ ~~— filed as Exhibit 3.2 to FNCB’s Current Report on Form 8-K on October 11, 2016, and incorporated herein by this reference.~~

~~EXHIBIT~~ ~~4.1~~	~~Form~~ ~~of Common Stock Certificate — filed as Exhibit 4.1 to FNCB’s Form 10-Q for the quarter ended September 30, 2016, as filed on November 4, 2016, and incorporated herein by this reference.~~

~~EXHIBIT~~ ~~4.2~~	~~Form~~ of Amended and Restated Subordinated Note — filed as Exhibit 4.2 to FNCB’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, as filed on August 7, 2015, and incorporated herein by this reference.

~~EXHIBIT~~ 31.1*	Certification of Chief Executive Officer

EXHIBIT 31.2*	Certification of Chief Financial Officer

EXHIBIT 32.1**	Section 1350 Certification —Chief Executive Officer and Chief Financial Officer


EXHIBIT 101.INS	Inline XBRL ~~INSTANCE DOCUMENT~~ Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)


EXHIBIT 101.SCH	INLINE XBRL TAXONOMY EXTENSION SCHEMA


EXHIBIT 101.CAL	INLINE XBRL TAXONOMY EXTENSION CALCULATION LINKBASE


EXHIBIT 101.DEF	INLINE XBRL TAXONOMY EXTENSION DEFINITION LINKBASE


EXHIBIT 101.LAB	INLINE XBRL TAXONOMY EXTENSION LABEL LINKBASE


EXHIBIT 101.PRE	INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

EXHIBIT 104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed herewith

~~Filed herewith~~

**	Furnished 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.

Table of Contents

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.

	~~Registrant: FNCB BANCORP, INC.~~

Date: November ~~7, 2017~~ 3, 2023	By:	/s/ Gerard A. Champi
	Gerard A. Champi
	Pr~~esident~~President and Chief Executive Officer



Date: November ~~7, 2017~~ 3, 2023	By:	/s/ James M. Bone, Jr.
	James M. Bone, Jr., CPA
	Executive Vice President and Chief Financial Officer
	Principal Financial Officer



Date: November ~~7, 2017~~ 3, 2023	By:	/s/ Stephanie A. Westington
	Stephanie A. Westington, CPA
	Senior Vice President and ~~Controller~~
	~~Principal~~Chief Accounting Officer
	Principal Accounting Officer

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)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $1.25 par value	FNCB	Nasdaq Capital Market

Large ~~Accelerated Filer~~ accelerated filer ☐		Accelerated ~~Filer~~ ☒filer ☐
Non-accelerated filer ☒
~~Non-Accelerated Filer~~ ☐	Smaller reporting company ☐☒
		Emerging growth c~~ompany~~company ☐

~~Common Stock, $1.25 par value~~	~~16,757,963~~ ~~shares~~
~~(Title of Class)~~	~~(Outstanding at~~ ~~November 3, 2017)~~

Contents
PART I. Financial Information	1
Item 1. Financial Statements (unaudited)	1
Consolidated Statements of Financial Condition	3 1
Consolidated Statements of Income	4 2
Consolidated Statements of Comprehensive (Loss) Income	5 3
Consolidated Statements of Changes in ~~Shareholders~~’Shareholders’ Equity	6 4
Consolidated Statements of Cash Flows	7 5
Notes to Consolidated Financial Statements	8 6
Item 2. ~~Management~~’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations	36 33
Item 3. Q~~uantitative~~Quantitative and Qualitative Disclosures about Market Risk	6052
Item 4. Controls and Procedures	6052
PART II. Other Information	6053
Item 1. Legal ~~Proceedings~~ Proceedings.	6053
Item 1A. Risk ~~Factors~~ Factors.	6153
Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds~~ Proceeds.	6154
Item 3. Defaults upon Senior ~~Securities~~ Securities.	6154
Item 4. Mine Safety ~~Disclosures~~ Disclosures.	6154
Item 5. Other ~~Information~~ Information.	6154
Item 6. ~~Exhibits~~ Exhibits.	6155

FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
~~(unaudited)~~

FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
~~CONSOLIDATED STATEMENTS OF INCOME~~(unaudited)
~~(unaudited)~~

FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited)
~~(unaudited)~~

											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

(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

	*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	)

	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, 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

	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

	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

	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

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

	*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

	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

	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

	*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

	*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

	*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

	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

		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

	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

	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

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Corporate Debt Securities Nine Months Ended September 30,
(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

	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%

	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	$	(960	)	Net gain on sale of securities
Taxes		-	Income taxes		326		Income taxes
Net of tax amount	$	-		$	(634	)

	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		-			26,423			118,277			-			-			-			144,700
Yield					2.48	%		2.81	%											2.75	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		-			-			-			-			35,272			-			35,271
Yield														2.80	%					2.80	%
Collateralized mortgage obligations - commercial		-			-			-			-			66,459			-			66,459
Yield														2.49	%					2.49	%
Mortgage-backed securities		-			-			-			-			22,522			-			22,522
Yield														2.86	%					2.86	%
Corporate debt securities		-			-			4,100			1,345			-			-			5,445
Yield								6.63	%		9.50	%								7.20	%
Asset-backed securities		-			-			-			-			3,512			-			3,512
Yield														2.45	%					2.45	%
Negotiable certificates of deposit		248			2,944			-			-			-			-			3,192
Yield		1.45	%		2.09	%														2.04	%
Equity securities		-			-			-			-			-			935			935
Yield																	3.45	%		3.45	%
Total available-for-sale maturities	$	248		$	29,367		$	122,377		$	1,345		$	127,765		$	935		$	282,037
Weighted average yield		1.45	%		2.44	%		2.94	%		9.50	%		2.64	%		3.45	%		2.78	%

	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	$	1,178		20.12	%	$	1,171		19.79	%
Commercial real estate		3,303		33.53	%		3,297		33.46	%
Construction, land acquisition and development		277		3.54	%		268		2.52	%
Commercial and industrial		2,363		19.30	%		1,736		20.69	%
Consumer		1,433		18.32	%		1,457		17.54	%
State and political subdivision		308		5.19	%		490		6.00	%
Total	$	8,862		100.00	%	$	8,419		100.00	%