UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-38408

FNCB BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania		23-2900790
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

102 E. Drinker St., Dunmore, PA		18512
(Address of Principal Executive Offices)		(Zip Code)

(570) 346-7667

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: ~~20,224,666~~19,984,131 shares as of ~~April~~July 30, 2021

Table of Contents

Contents
PART I. Financial Information	1
Item 1. Financial Statements (unaudited)	1
Consolidated Statements of Financial Condition	1
Consolidated Statements of Income	2
Consolidated Statements of Comprehensive Income	3
Consolidated Statements of Changes in Shareholders’ Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures about Market Risk	4346
Item 4. Controls and Procedures	4346
PART II. Other Information	4447
Item 1. Legal Proceedings.	4447
Item 1A. Risk Factors.	4447
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	4447
Item 3. Defaults upon Senior Securities.	4447
Item 4. Mine Safety Disclosures.	4447
Item 5. Other Information.	4447
Item 6. Exhibits.	4548

Table of Contents

Part I - Financial Information

Item 1 - Financial Statements

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

	*March 31,*		*December 31,*		*June 30,*		*December 31,*
(in thousands, except share data)	*2021*		*2020*		*2021*		*2020*
Assets
Cash and cash equivalents:
Cash and due from banks	$	22,382	$	24,822	$	24,782	$	24,822
Interest-bearing deposits in other banks		76,172		130,989		31,160		130,989
Total cash and cash equivalents		98,554		155,811		55,942		155,811
Available-for-sale debt securities, at fair value		407,396		350,035		432,807		350,035
Equity securities, at fair value		4,267		3,026		4,303		3,026
Restricted stock, at cost		1,149		1,745		1,099		1,745
Loans held for sale		267		2,107		642		2,107
Loans, net of allowance for loan and lease losses of $12,076 and $11,950		919,867		889,152
Loans, net of allowance for loan and lease losses of $12,285 and $11,950						964,253		889,152
Bank premises and equipment, net		17,407		17,579		17,360		17,579
Accrued interest receivable		4,567		4,286		4,485		4,286
Bank-owned life insurance		33,074		31,712		33,216		31,712
Other assets		13,488		10,226		10,656		10,226
Total assets	$	1,500,036	$	1,465,679	$	1,524,763	$	1,465,679

Liabilities
Deposits:
Demand (non-interest-bearing)	$	319,532	$	271,499	$	312,408	$	271,499
Interest-bearing		1,003,296		1,015,949		1,025,770		1,015,949
Total deposits		1,322,828		1,287,448		1,338,178		1,287,448
Borrowed funds:
Federal Home Loan Bank of Pittsburgh advances		0		0
Junior subordinated debentures		10,310		10,310
Total borrowed funds		10,310		10,310
Borrowed funds						10,310		10,310
Accrued interest payable		99		108		87		108
Accrued income tax expense		590		0
Other liabilities		11,279		11,953		15,574		11,953
Total liabilities		1,345,106		1,309,819		1,364,149		1,309,819

Shareholders' equity
Preferred shares ($1.25 par)
Authorized: 20,000,000 shares at March 31, 2021 and December 31, 2020
Issued and outstanding: 0 shares at March 31, 2021 and December 31, 2020		0		0
Authorized: 20,000,000 shares at June 30, 2021 and December 31, 2020
Issued and outstanding: 0 shares at June 30, 2021 and December 31, 2020						0		0
Common shares ($1.25 par)
Authorized: 50,000,000 shares at March 31, 2021 and December 31, 2020
Issued and outstanding: 20,240,668 shares at March 31, 2021 and 20,245,649 shares at December 31, 2020		25,300		25,307
Authorized: 50,000,000 shares at June 30, 2021 and December 31, 2020
Issued and outstanding: 20,102,602 shares at June 30, 2021 and 20,245,649 shares at December 31, 2020						25,128		25,307
Additional paid-in capital		81,640		81,587		80,591		81,587
Retained earnings		39,691		35,080		43,698		35,080
Accumulated other comprehensive income		8,299		13,886		11,197		13,886
Total shareholders' equity		154,930		155,860		160,614		155,860
Total liabilities and shareholders’ equity	$	1,500,036	$	1,465,679	$	1,524,763	$	1,465,679

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

Table of Contents

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

	*Three Months Ended March 31,*				*Three Months Ended June 30,*				*Six Months Ended June 30,*
(in thousands, except share data)	*2021*		*2020*		*2021*		*2020*		*2021*		*2020*
Interest income
Interest and fees on loans	$	9,786	$	9,139	$	10,242	$	9,060	$	20,028	$	18,199
Interest and dividends on securities:
Taxable		1,906		1,852		1,980		1,692		3,886		3,544
Tax-exempt		486		57		516		388		1,002		445
Dividends		62		75		59		47		121		122
Total interest and dividends on securities		2,454		1,984		2,555		2,127		5,009		4,111
Interest on interest-bearing deposits in other banks		3		21		1		3		4		24
Total interest income		12,243		11,144		12,798		11,190		25,041		22,334
Interest expense
Interest on deposits		798		1,660		718		1,376		1,516		3,036
Interest on borrowed funds:
Federal Reserve Bank Discount Window advances						0		14		0		14
Federal Home Loan Bank of Pittsburgh advances		0		219		0		160		0		379
Junior subordinated debentures		48		88		48		60		96		148
Total interest on borrowed funds		48		307		48		234		96		541
Total interest expense		846		1,967		766		1,610		1,612		3,577
Net interest income before provision for loan and lease losses		11,397		9,177		12,032		9,580		23,429		18,757
Provision for loan and lease losses		186		1,151		155		831		341		1,982
Net interest income after provision for loan and lease losses		11,211		8,026		11,877		8,749		23,088		16,775
Non-interest income
Deposit service charges		874		825		956		708		1,830		1,533
Net gain on the sale of available-for-sale debt securities		213		149		0		922		213		1,071
Net gain on equity securities		364		14		36		4		400		18
Net gain on the sale of mortgage loans held for sale		224		96		47		183		271		279
Loan-related fees		133		56		104		25		237		81
Income from bank-owned life insurance		121		129		142		119		263		248
Bank-owned life insurance settlement		422		0		4		0		426		0
Loan referral fees						16		214		16		262
Merchant services revenue		138		135		156		112		294		247
Other		285		290		248		214		533		456
Total non-interest income		2,774		1,694		1,709		2,501		4,483		4,195
Non-interest expense
Salaries and employee benefits		3,736		3,929		4,038		3,498		7,774		7,427
Occupancy expense		609		554		431		466		1,040		1,020
Equipment expense		353		371		333		360		686		731
Advertising expense		117		207		214		113		331		320
Data processing expense		819		725		885		709		1,704		1,434
Regulatory assessments		188		59		112		74		300		133
Bank shares tax		315		300		342		315		657		615
Professional fees		259		188		112		193		371		381
Insurance expense						144		124		288		247
Other operating expenses		775		872		615		572		1,246		1,321
Total non-interest expense		7,171		7,205		7,226		6,424		14,397		13,629
Income before income tax expense		6,814		2,515		6,360		4,826		13,174		7,341
Income tax expense		981		452		1,131		805	��	2,112		1,257
Net income	$	5,833	$	2,063	$	5,229	$	4,021	$	11,062	$	6,084

Earnings per share
Basic	$	0.29	$	0.10	$	0.26	$	0.20	$	0.55	$	0.30
Diluted	$	0.29	$	0.10	$	0.26	$	0.20	$	0.55	$	0.30

Cash dividends declared per common share	$	0.060	$	0.055	$	0.060	$	0.055	$	0.120	$	0.110
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic		20,242,262		20,172,498		20,222,216		20,191,527		20,232,183		20,182,012
Diluted		20,253,606		20,176,565		20,232,694		20,191,527		20,243,094		20,184,046

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

Table of Contents

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

	*Three Months Ended March 31,*						*Three Months Ended June 30,*						*Six Months Ended June 30,*
(in thousands)	*2021*			*2020*			*2021*			*2020*			*2021*			*2020*
Net income	$	5,833		$	2,063		$	5,229		$	4,021		$	11,062		$	6,084
Other comprehensive (loss) income:
Unrealized (losses) gains on available-for-sale debt securities		(7,067	)		4,336
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale debt securities								3,692			6,658			(3,375	)		10,994
Taxes		1,484			(911	)		(775	)		(1,398	)		709			(2,309	)
Net of tax amount		(5,583	)		3,425			2,917			5,260			(2,666	)		8,685

Reclassification adjustment for gains included in net income		(213	)		(149	)		0			(922	)		(213	)		(1,071	)
Taxes		45			32			0			193			45			225
Net of tax amount		(168	)		(117	)		0			(729	)		(168	)		(846	)

Derivative adjustments		208			(16	)		(24	)		(131	)		184			(147	)
Taxes		(44	)		3			5			28			(39	)		31
Net of tax amount		164			(13	)		(19	)		(103	)		145			(116	)
Total other comprehensive (loss) income		(5,587	)		3,295
Total other comprehensive income (loss)								2,898			4,428			(2,689	)		7,723
Comprehensive income	$	246		$	5,358		$	8,127		$	8,449		$	8,373		$	13,807

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

Table of Contents

FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and Six Months Ended ~~March 31,~~June 30, 2021 and 2020

(unaudited)

(in thousands, except per share data)	*Number of Common Shares*			*Common Stock*			*Additional Paid-in Capital*			*Retained Earnings*			*Accumulated Other Comprehensive Income*			*Total Shareholders' Equity*			*Number of Common Shares*			*Common Stock*			*Additional Paid-in Capital*			*Retained Earnings*			*Accumulated Other Comprehensive Income*			*Total Shareholders' Equity*
Balances, December 31, 2019		20,171,408		$	25,214		$	81,130		$	24,207		$	3,056		$	133,607
For the three months ended:
Balances, March 31, 2020																				20,174,250		$	25,217		$	81,209	��	$	25,155		$	6,351		$	137,932
Net income for the period		-			0			0			2,063			0			2,063			-			0			0			4,021			0			4,021
Cash dividends paid, $0.055 per share		-			0			0			(1,110	)		0			(1,110	)		-			0			0			(1,111	)		0			(1,111	)
Restricted stock awards		-			0			62			0			0			62			-			0			81			0			0			81
Common shares issued under long-term incentive compensation plan																				31,783			40			(40	)		0			0			0
Common shares issued through dividend reinvestment/optional cash purchase plan		2,842			3			17			(5	)		0			15			2,574			3			11			(8	)		0			6
Other comprehensive income, net of tax of $876		-			0			0			0			3,295			3,295
Balances, March 31, 2020		20,174,250		$	25,217		$	81,209		$	25,155		$	6,351		$	137,932
Other comprehensive income, net of tax of $1,177																				-			0			0			0			4,428			4,428
Balances, June 30, 2020																				20,208,607		$	25,260		$	81,261		$	28,057		$	10,779		$	145,357

Balances, December 31, 2020		20,245,649		$	25,307		$	81,587		$	35,080		$	13,886		$	155,860
Balances, March 31, 2021																				20,240,668		$	25,300		$	81,640		$	39,691		$	8,299		$	154,930
Net income for the period		-			0			0			5,833			0			5,833			-			0			0			5,229			0			5,229
Cash dividends paid, $0.060 per share		-			0			0			(1,215	)		0			(1,215	)		-			0			0			(1,214	)		0			(1,214	)
Restricted stock awards		-			0			80			0			0			80			-			0			98			0			0			98
Repurchase of common shares		(8,188	)		(11	)		(46	)		0			0			(57	)		(185,342	)		(231	)		(1,109	)		0			0			(1,340	)
Common shares issued under long-term incentive compensation plan																				44,238			55			(55	)		0			0			0
Common shares issued through dividend reinvestment/optional cash purchase plan		3,207			4			19			(7	)		0			16			3,038			4			17			(8	)		0			13
Other comprehensive loss, net of tax of $1,485		-			0			0			0			(5,587	)		(5,587	)
Balances, March 31, 2021		20,240,668		$	25,300		$	81,640		$	39,691		$	8,299		$	154,930
Other comprehensive income, net of tax of $770																				-			0			0			0			2,898			2,898
Balances, June 30, 2021																				20,102,602		$	25,128		$	80,591		$	43,698		$	11,197		$	160,614

For the six months ended:
Balances, December 31, 2019																				20,171,408		$	25,214		$	81,130		$	24,207		$	3,056		$	133,607
Net income for the period																				-			0			0			6,084			0			6,084
Cash dividends paid, $0.110 per share																				-			0			0			(2,221	)		0			(2,221	)
Restricted stock awards																				-			0			143			0			0			143
Common shares issued under long-term incentive compensation plan																				31,783			40			(40	)		0			0			0
Common shares issued through dividend reinvestment/optional cash purchase plan																				5,416			6			28			(13	)		0			21
Other comprehensive income, net of tax of $2,053																				-			0			0			0			7,723			7,723
Balances, June 30, 2020																				20,208,607		$	25,260		$	81,261		$	28,057		$	10,779		$	145,357

Balances, December 31, 2020																				20,245,649		$	25,307		$	81,587		$	35,080		$	13,886		$	155,860
Net income for the period																				-			0			0			11,062			0			11,062
Cash dividends paid, $0.120 per share																				-			0			0			(2,429	)		0			(2,429	)
Restricted stock awards																				-			0			178			0			0			178
Repurchase of common shares																				(193,530	)		(242	)		(1,155	)		0			0			(1,397	)
Common shares issued under long-term incentive compensation plan																				44,238			55			(55	)		0			0			0
Common shares issued through dividend reinvestment/optional cash purchase plan																				6,245			8			36			(15	)		0			29
Other comprehensive loss, net of tax of $715																				-			0			0			0			(2,689	)		(2,689	)
Balances, June 30, 2021																				20,102,602		$	25,128		$	80,591		$	43,698		$	11,197		$	160,614

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

Table of Contents

FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

	*Three Months Ended March 31,*						*Six Months Ended June 30,*
(in thousands)	*2021*			*2020*			*2021*			*2020*
Cash flows from operating activities:
Net income	$	5,833		$	2,063		$	11,062		$	6,084
Adjustments to reconcile net income to net cash provided by operating activities:
Investment securities amortization, net		362			120			883			366
Equity in trust		(1	)		(3	)		(3	)		(4	)
Depreciation of bank premises and equipment		389			408			778			808
Amortization of loan origination (fees) costs		(1,262	)		336			(2,476	)		232
Valuation adjustment for loan servicing rights		(5	)		23			(7	)		53
Stock-based compensation expense		80			62			178			143
Provision for loan and lease losses		186			1,151			341			1,982
Valuation adjustment for other real estate owned								(40	)		0
Valuation adjustment for off-balance sheet commitments		(15	)		2			(128	)		(42	)
Net gain on the sale of available-for-sale debt securities		(213	)		(149	)		(213	)		(1,071	)
Net gain on equity securities		(364	)		(14	)		(400	)		(18	)
Net gain on the sale of mortgage loans held for sale		(224	)		(96	)		(271	)		(279	)
Bank-owned life insurance settlement		(422	)		0			(426	)		0
Income from bank-owned life insurance		(121	)		(129	)		(263	)		(248	)
Proceeds from the sale of mortgage loans held for sale		4,533			2,982			6,162			6,190
Funds used to originate mortgage loans held for sale		(2,469	)		(2,295	)		(4,426	)		(5,615	)
Decrease in net deferred tax assets		391			452			392			1,257
Increase in accrued interest receivable		(281	)		(153	)		(199	)		(1,967	)
(Increase) decrease in other assets		(228	)		87
(Decrease) increase in accrued interest payable		(9	)		3
Increase in accrued income tax expense		590			0
Decrease in other liabilities		(733	)		(548	)
Decrease in other assets								189			720
Decrease in accrued interest payable								(21	)		(10	)
(Decrease) increase in other liabilities								(757	)		2,710
Total adjustments		184			2,239			(707	)		5,207
Net cash provided by operating activities		6,017			4,302			10,355			11,291

Cash flows from investing activities:
Maturities, calls and principal payments of available-for-sale debt securities		5,804			3,865			14,086			9,058
Proceeds from the sale of available-for-sale debt securities		2,981			7,975			2,981			51,888
Purchases of available-for-sale debt securities		(73,575	)		(37,424	)		(99,589	)		(83,090	)
Purchases of equity securities		(877	)		0			(877	)		0
Redemption (purchase) of the stock in Federal Home Loan Bank of Pittsburgh		596			(420	)
Redemption of the stock in Federal Home Loan Bank of Pittsburgh								646			495
Net increase in loans to customers		(29,610	)		(6,966	)		(73,030	)		(120,035	)
Proceeds from the sale of other real estate owned		0			204			0			204
Proceeds from bank-owned life insurance settlement								1,685			0
Purchase of bank-owned life insurance		(2,500	)		0			(2,500	)		0
Purchases of bank premises and equipment		(217	)		(337	)		(559	)		(757	)
Net cash used in investing activities		(97,398	)		(33,103	)		(157,157	)		(142,237	)

Cash flows from financing activities:
Net increase (decrease) in deposits		35,380			(147	)
Proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight		0			21,025
Net increase in deposits								50,730			167,918
Repayments of Federal Home Loan Bank of Pittsburgh advances - overnight								0			(14,100	)
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term		0			10,000			0			20,000
Repayment of Federal Home loan Bank of Pittsburgh advances - term								0			(10,000	)
Proceeds from Federal Reserve Bank Discount Window advances		0			10,000			0			46,272
Repayment of Federal Reserve Bank Discount Window advances								0			(10,030	)
Repurchase of common shares		(57	)		0			(1,397	)		0
Proceeds from issuance of common shares, net of discount		16			15			29			21
Cash dividends paid		(1,215	)		(1,110	)		(2,429	)		(2,221	)
Net cash provided by financing activities		34,124			39,783			46,933			197,860
Net (decrease) increase in cash and cash equivalents		(57,257	)		10,982			(99,869	)		66,914
Cash and cash equivalents at beginning of period		155,811			34,565			155,811			34,565
Cash and cash equivalents at end of period	$	98,554		$	45,547		$	55,942		$	101,479

Supplemental cash flow information
Cash paid during the period for:
Interest	$	855		$	1,963		$	1,633		$	3,587
Taxes								2,180			0
Other transactions:
Loans transferred to OREO								138			0
Available-for-sale debt securities purchased, not settled								4,508			0
Lease liabilities arising from obtaining right-of-use assets		42			15			42			15

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

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FNCB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Basis of Presentation

The consolidated financial statements of FNCB are comprised of the accounts of FNCB Bancorp, Inc., and its wholly owned subsidiary, FNCB Bank (the “Bank”), as well as the Bank’s wholly owned subsidiaries (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 and Article 10-01 of Regulation S-X. Accordingly, they do not include all 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 six months ended ~~March 31,~~June 30, 2021may not be indicative of future results of operations and financial position.

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 losses (“ALLL”), securities’ valuation and impairment evaluation, the valuation of other real estate owned (“OREO”), and income taxes.

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in FNCB’s audited financial statements, included in the Annual Report filed on Form 10-K as of and for the year ended December 31, 2020.

Note 2. New Authoritative Accounting Guidance

Accounting Guidance to be Adopted in Future Periods

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” replaces the current loss impairment methodology under GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 is commonly referred to as Current Expected Credit Losses ("CECL") and will require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income, including such financial assets as loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. On June 17, 2016, the four federal financial institution regulatory agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency), issued a joint statement to provide information about ASU 2016-13 and the initial supervisory views regarding the implementation of the new standard. The joint statement applies to all banks, savings associations, credit unions and financial institution holding companies, regardless of asset size. The statement details the key elements of, and the steps necessary for, the successful transition to the new accounting standard. In addition, the statement notifies financial institutions that because the appropriate allowance levels are institution-specific amounts, the agencies will not establish benchmark targets or ranges for the change in institutions’ allowance levels upon adoption of the ASU, or for allowance levels going forward. Due to the importance of ASU 2016-13, the agencies encourage financial institutions to begin planning and preparing for the transition and state that senior management, under the oversight of the board of directors, should work closely with staff in their accounting, lending, credit risk management, internal audit, and information technology functions during the transition period leading up to, and well after, adoption. ASU 2016-13 was originally effective for public business entities that are registered with the U.S. Securities and Exchange Commission (“SEC”) under the Securities and Exchange Act of 1934, as amended, including smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On November 15, 2019, the FASB issued ASU 2019-10, "Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates," which finalized various effective ~~dates delay~~date delays for private companies, not-for-profit organizations, and certain smaller reporting companies. Specifically, under ASU 2019-10, the effective date for implementation of CECL for smaller reporting companies, private companies and not-for-profits was extended to fiscal years, and interim periods within those years, beginning after December 15, 2022. FNCB is a smaller reporting company, and accordingly, will adopt this guidance on January 1, 2023. FNCB has ~~created~~ a CECL task group comprised of members of its finance, credit administration, lending, internal audit, loan operations and information systems units. The CECL task group understands the provisions of ASU 2016-13 and is currently in the process of implementing the new guidance, which includes, but is not limited to: (1) identifying segments and sub-segments within the loan portfolio that have similar risk characteristics; (2) determining the appropriate methodology for each segment; (3) implementing changes that are necessary to its core operating system and interfaces to be able to capture appropriate data requirements; and (4) evaluating qualitative factors and economic to develop appropriate forecasts for integration into the model. FNCB is currently evaluating the effect this guidance may have on its operating results and/or financial position, including assessing any potential impact on its capital.

Refer to Note 2 to FNCB’s consolidated financial statements included in the ~~2020~~Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the "2020 Annual Report") for a discussion of additional accounting guidance applicable to FNCB that will be adopted in future periods.

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Note 3. Securities

Debt Securities

The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s available-for-sale debt securities at ~~March 31,~~June 30, 2021and December 31, 2020:

	*March 31, 2021*								*June 30, 2021*
			*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 debt securities:
U.S. Treasury securities	$	1,937	$	0	$	21	$	1,916	$	5,106	$	18	$	0	$	5,124
Obligations of state and political subdivisions		197,376		9,309		1,057		205,628		204,215		11,422		248		215,389
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		105,756		1,883		1,209		106,430		105,758		2,121		879		107,000
Collateralized mortgage obligations - commercial		3,712		137		46		3,803		3,703		138		20		3,821
Mortgage-backed securities		15,908		546		87		16,367		19,565		483		72		19,976
Private collateralized mortgage obligations		37,352		294		134		37,512		41,068		296		117		41,247
Corporate debt securities		25,550		798		76		26,272		28,800		948		60		29,688
Asset-backed securities		9,396		89		17		9,468		10,491		88		17		10,562
Total available-for-sale debt securities	$	396,987	$	13,056	$	2,647	$	407,396	$	418,706	$	15,514	$	1,413	$	432,807

	*December 31, 2020*
			*Gross*		*Gross*
			*Unrealized*		*Unrealized*
	*Amortized*		*Holding*		*Holding*		*Fair*
(in thousands)	*Cost*		*Gains*		*Losses*		*Value*
Available-for-sale debt securities:
Obligations of state and political subdivisions	$	192,851	$	13,012	$	35	$	205,828
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		54,091		2,940		59		56,972
Collateralized mortgage obligations - commercial		3,721		183		0		3,904
Mortgage-backed securities		12,452		588		14		13,026
Private collateralized mortgage obligations		37,926		352		79		38,199
Corporate debt securities		23,800		790		10		24,580
Asset-backed securities		7,505		46		25		7,526
Total available-for-sale debt securities	$	332,346	$	17,911	$	222	$	350,035

Except for securities of U.S. government and government-sponsored agencies, there were 0no securities of any individual issuer that exceeded 10.0% of shareholders’ equity at ~~March 31,~~June 30, 2021 and December 31, 2020.

Securities with a carrying amounts of ~~$333.9~~$345.7 million at ~~March 31,~~June 30, 2021 and $279.7 million at December 31, 2020 were pledged as collateral to secure public deposits and for other purposes.

The following table presents the maturity information of FNCB’s available-for-sale debt securities at ~~March 31,~~June 30, 2021. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because 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 maturity summary.

	*March 31, 2021*				*June 30, 2021*
	*Amortized*		*Fair*		*Amortized*		*Fair*
(in thousands)	*Cost*		*Value*		*Cost*		*Value*
Amounts maturing in:
One year or less	$	4,665	$	4,696	$	4,666	$	4,674
After one year through five years		63,426		67,575		63,701		67,772
After five years through ten years		44,085		45,473		51,626		53,512
After ten years		112,687		116,072		118,128		124,243
Mortgage-backed securities		15,908		16,367		19,565		19,976
Collateralized mortgage obligations		146,820		147,745		150,529		152,068
Asset-backed securities		9,396		9,468		10,491		10,562
Total available-for-sale debt securities	$	396,987	$	407,396	$	418,706	$	432,807

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The following table presents the gross proceeds received and gross realized gains and losses on sales of available-for-sale debt securities for the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020.

	*Three Months Ended March 31,*				*Three Months Ended June 30,*					*Six Months Ended June 30,*
(in thousands)	*2021*		*2020*		*2021*		*2020*			*2021*		*2020*
Available-for-sale debt securities:
Gross proceeds received on sales	$	2,981	$	7,975	$	0	$	43,913		$	2,981	$	51,888
Gross realized gains		213		149		0		1,027			213		1,176
Gross realized losses						0		(105	)		0		(105	)

The following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities with unrealized losses at ~~March 31,~~June 30, 2021and December 31, 2020, aggregated by investment category and length of time the securities have been in an unrealized loss position.

	*March 31, 2021*																		*June 30, 2021*
	*Less than 12 Months*						*12 Months or Greater*						*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*
U.S. Treasury securities		1	$	1,916	$	21		0	$	0	$	0		1	$	1,916	$	21		0	$	0	$	0		0	$	0	$	0		0	$	0	$	0
Obligations of state and political subdivisions		39		30,965		1,057		0		0		0		39		30,965		1,057		21		16,498		248		0		0		0		21		16,498		248
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		11		34,711		1,209		0		0		0		11		34,711		1,209		12		35,443		839		1		1,731		40		13		37,174		879
Collateralized mortgage obligations - commercial		1		1,655		46		0		0		0		1		1,655		46		1		1,674		20		0		0		0		1		1,674		20
Mortgage-backed securities		3		5,607		87		0		0		0		3		5,607		87		2		5,003		72		0		0		0		2		5,003		72
Private collateralized mortgage obligations		4		11,748		123		1		2,161		11		5		13,909		134		6		13,397		111		1		1,932		6		7		15,329		117
Corporate debt securities		9		7,224		76		0		0		0		9		7,224		76		6		5,240		60		0		0		0		6		5,240		60
Asset-backed securities		1		934		3		2		1,685		14		3		2,619		17		3		2,577		7		2		1,508		10		5		4,085		17
Total available-for-sale debt securities		69	$	94,760	$	2,622		3	$	3,846	$	25		72	$	98,606	$	2,647		51	$	79,832	$	1,357		4	$	5,171	$	56		55	$	85,003	$	1,413

	*December 31, 2020*
	*Less than 12 Months*						*12 Months or Greater*						*Total*
	*Number*				*Gross*		*Number*				*Gross*		*Number*				*Gross*
	of		*Fair*		*Unrealized*		of		*Fair*		*Unrealized*		of		*Fair*		*Unrealized*
(dollars in thousands)	*Securities*		*Value*		*Losses*		*Securities*		*Value*		*Losses*		*Securities*		*Value*		*Losses*
Obligations of state and political subdivisions		6	$	4,541	$	35		0	$	0	$	0		6	$	4,541	$	35
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		2		7,019		59		0		0		0		2		7,019		59
Collateralized mortgage obligations - commercial		0		0		0		0		0		0		0		0		0
Mortgage-backed securities		1		2,103		14		0		0		0		1		2,103		14
Private collateralized mortgage obligations		3		7,857		42		1		2,256		37		4		10,113		79
Corporate debt securities		2		1,739		10		0		0		0		2		1,739		10
Asset-backed securities		2		746		13		1		1,591		12		3		2,337		25
Total available-for-sale debt securities		16	$	24,005	$	173		2	$	3,847	$	49		18	$	27,852	$	222

Management evaluates individual securities in an unrealized loss position quarterly for other than temporary impairment (“OTTI”). As part of its evaluation, management considers, among other things, the length of time a security’s fair value is less than its amortized cost, the severity of decline, any credit deterioration of the issuer, whether or ~~not~~management intends to sell the security, and whether it is more likely than not that FNCB will be required to sell the security prior to recovery of its amortized cost.

Management performed a review of all securities in an unrealized loss position as of ~~March 31,~~June 30, 2021and determined that changes in the fair values of the securities were consistent with movements in market interest rates and spreads or general market conditions. 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 ~~March 31,~~June 30, 2021. FNCB does not intend to sell the securities, nor is it more likely than not that it will be required to sell the securities, prior to recovery of their amortized cost. Based on the results of its review and considering the attributes of these debt securities, management concluded that the individual unrealized losses were temporary and OTTI did not exist at ~~March 31,~~June 30, 2021.

Equity Securities

Included in equity securities with readily determinable fair values at ~~March 31,~~June 30, 2021 and December 31, 2020 were investments in the common or preferred stock of publicly traded bank holding companies and an investment in a mutual fund comprised of 1-4 family residential mortgage-backed securities collateralized by properties within FNCB’s market area. Equity securities had a cost basis and fair value of $3.4 million and $4.3 million, respectively, at ~~March 31,~~June 30, 2021 and $2.5 million and $3.0 million, respectively, at December 31, 2020. Equity securities with readily determinable fair values are reported at fair value with net unrealized gains and losses recognized in the consolidated statements of income.

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The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the three and six months ended ~~March 31,~~June 30, 2021 and ~~2020.~~2020.

	*Three Months Ended March 31,*				*Three Months Ended June 30,*				*Six Months Ended June 30,*
(in thousands)	*2021*		*2020*		*2021*		*2020*		*2021*		*2020*
Net gains recognized on equity securities	$	364	$	14	$	36	$	4	$	400	$	18
Less: net gains recognized on equity securities sold or transferred		0		0		0		0		0		0
Unrealized gains on equity securities held	$	364	$	14	$	36	$	4	$	400	$	18

Equity Securities without Readily Determinable Fair Values

At ~~March 31,~~June 30, 2021 and December 31, 2020, equity securities without readily determinable fair values consisted of a $500 thousand investment in a fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company, which is included in other assets in the consolidated statement of financial condition. The preferred stock pays quarterly dividends at an annual rate of 8.25%, which commenced on March 30, 2021. The preferred stock of this bank holding company is not traded on any established market and is accounted for as an equity security without a determinable fair value. Under 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. As part of its qualitative assessment, management engaged an independent third party to provide a valuation of this investment as of ~~March 31,~~June 30, 2021, which indicated that the investment was not impaired. ~~Management~~Accordingly, management determined that no adjustment for impairment was required at ~~March 31,~~June 30, 2021and December 31, ~~2020.~~2020.

Restricted Securities

The following table presents FNCB's investment in restricted stock at ~~March 31,~~June 30, 2021 and December 31, 2020. Restricted stock has limited marketability and is carried at cost.

	*March 31,*		*December 31,*		*June 30,*		*December 31,*
(in thousands)	*2021*		*2020*		*2021*		*2020*
Stock in Federal Home Loan Bank of Pittsburgh	$	1,139	$	1,735	$	1,089	$	1,735
Stock in Atlantic Community Banker's Bank		10		10		10		10
Total restricted securities, at cost	$	1,149	$	1,745	$	1,099	$	1,745

Management noted no indicators of impairment for the Federal Home Loan Bank of Pittsburgh or Atlantic Community Banker’s Bank stock at ~~March 31,~~June 30, 2021 and December 31, 2020.

Note 4. ~~Loans/Subsequent Event~~Loans

The following table summarizes loans receivable, net, by category at ~~March 31,~~June 30, 2021 and December 31, 2020:

	*March 31,*			*December 31,*			*June 30,*			*December 31,*
(in thousands)	*2021*			*2020*			*2021*			*2020*
Residential real estate	$	198,519		$	196,328		$	210,493		$	196,328
Commercial real estate		286,575			273,903			324,239			273,903
Construction, land acquisition and development		56,857			59,785			53,659			59,785
Commercial and industrial		264,267			238,435			248,228			238,435
Consumer		82,521			85,881			81,459			85,881
State and political subdivisions		46,891			49,009			61,774			49,009
Total loans, gross		935,630			903,341			979,852			903,341
Unearned income		(116	)		(110	)		(268	)		(110	)
Net deferred loan fees		(3,571	)		(2,129	)		(3,046	)		(2,129	)
Allowance for loan and lease losses		(12,076	)		(11,950	)		(12,285	)		(11,950	)
Loans, net	$	919,867		$	889,152		$	964,253		$	889,152

Included in commercial and industrial loans at ~~March 31,~~June 30, 2021 and December 31, 2020 were ~~$107.4~~$85.8 million and $78.6 million, respectively, in loans originated under the Payment Protection Program ("PPP"). Included in net deferred loan fees at ~~March 31,~~June 30, 2021 and December 31, 2020, were ~~$3.9~~$3.5 million and $2.6 million, respectively, in deferred loan origination fees, net of deferred loan origination costs, associated with the PPP loans. PPP loans are 100.0% guaranteed and may be forgiven by the SBA. Accordingly, there was 0 ALLL established for PPP loans at ~~March 31,~~June 30, 2021 and December 31, 2020.

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 6,, “Related Party Transactions” to these consolidated financial statements.

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FNCB originates 1-4 family mortgage loans for sale in the secondary market. During the three and sixmonths ended ~~March 31,~~June 30, 2021, ~~and~~ ~~2020,~~the principal balance of ~~1-4~~1-4 family mortgages sold on the secondary market were $~~4.3~~1.6 million and ~~$2.9~~$5.9 million, respectively, compared to $3.0 million and $5.9 million for the three and six months ended June 30, 2020, respectively. Net gains on the sale of residential mortgage loans for the three ~~months ended~~and ~~March 31, 2021~~ ~~were $224 thousand and $96 thousand for the~~ ~~three~~six months ended ~~March 31,~~ June 30, 2021 were $47 thousand and $271 thousand, respectively, and $183 thousand and $279 thousand, respectively, for the comparable periods of 2020.FNCB retains servicing rights on mortgages sold on the secondary market. At ~~March 31,~~June 30, 2021 and December 31, 2020, there were ~~$0.3~~$0.6 million and $2.1 million, respectively, in 1-4 family residential mortgage loans held for sale.

The unpaid principal balance of loans serviced for others, which ~~include~~includes residential mortgages and SBA-guaranteed loans, was ~~$93.6~~$85.5 million at ~~March 31,~~June 30, 2021and $96.5 million at December 31, 2020.

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 ~~three~~six months ended ~~March 31,~~June 30, 2021. Refer to Note 2, “Summary of Significant Accounting Policies” to FNCB’s consolidated financial statements included in the 2020 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.

Management evaluates the credit quality of the loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ALLL on a quarterly basis. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. However, actual loan losses may be significantly more than the established ALLL, which could have a material negative effect on FNCB’s operating results or financial condition. Management continues to monitor the loan portfolio for any potential adverse impact to asset quality related to the COVID-19 pandemic. While management uses the best information available to make its evaluations, future adjustments to the ALLL may be necessary if conditions differ substantially from the information used in making the evaluations. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL.

The following table summarizes activity in the ALLL by loan category for the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020.

						*Construction,*																							Construction,
						*Land*									*State and*														Land									State and
	*Residential*		*Commercial*			*Acquisition and*			*Commercial*						*Political*								*Residential*			*Commercial*			*Acquisition and*			*Commercial*						*Political*
(in thousands)	*Real Estate*		*Real Estate*			*Development*			*and Industrial*			*Consumer*			*Subdivisions*			*Unallocated*		*Total*			*Real Estate*			*Real Estate*			*Development*			*and Industrial*			*Consumer*			*Subdivisions*		*Unallocated*		*Total*
Three months ended March 31, 2021
Three months ended June 30, 2021
Allowance for loan losses:
Beginning balance, April 1, 2021																							$	1,732		$	4,521		$	516		$	2,603		$	1,219		$	387	$	1,098	$	12,076
Charge-offs																								(6	)		0			0			(11	)		(119	)		0		0		(136	)
Recoveries																								13			0			0			7			170			0		0		190
Provisions (credits)																								119			127			(23	)		(116	)		(93	)		122		19		155
Ending balance, June 30, 2021																							$	1,858		$	4,648		$	493		$	2,483		$	1,177		$	509	$	1,117	$	12,285

Three months ended June 30, 2020
Allowance for loan losses:
Beginning balance, April 1, 2020																							$	1,307		$	3,557		$	283		$	2,304		$	1,714		$	270	$	472	$	9,907
Charge-offs																								0			0			0			(92	)		(224	)		0		0		(316	)
Recoveries																								37			1			0			425			139			0		0		602
Provisions (credits)																								7			384			77			(294	)		60			67		530		831
Ending balance, June 30, 2020																							$	1,351		$	3,942		$	360		$	2,343		$	1,689		$	337	$	1,002	$	11,024

Six months ended June 30, 2021
Allowance for loan losses:
Beginning balance, January 1, 2021	$	1,715	$	4,268		$	538		$	2,619		$	1,319		$	405		$	1,086	$	11,950		$	1,715		$	4,268		$	538		$	2,619		$	1,319		$	405	$	1,086	$	11,950
Charge-offs		0		0			0			(19	)		(342	)		0			0		(361	)		(6	)		0			0			(30	)		(461	)		0		0		(497	)
Recoveries		3		46			0			25			227			0			0		301			16			46			0			32			397			0		0		491
Provisions (credits)		14		207			(22	)		(22	)		15			(18	)		12		186			133			334			(45	)		(138	)		(78	)		104		31		341
Ending balance, March 31, 2021	$	1,732	$	4,521		$	516		$	2,603		$	1,219		$	387		$	1,098	$	12,076
Ending balance, June 30, 2021																							$	1,858		$	4,648		$	493		$	2,483		$	1,177		$	509	$	1,117	$	12,285

Three months ended March 31, 2020
Six months ended June 30, 2020
Allowance for loan losses:
Beginning balance, January 1, 2020	$	1,147	$	3,198		$	271		$	1,997		$	1,658		$	253		$	426	$	8,950		$	1,147		$	3,198		$	271		$	1,997		$	1,658		$	253	$	426	$	8,950
Charge-offs		0		(56	)		0			(35	)		(238	)		0			0		(329	)		0			(56	)		0			(127	)		(462	)		0		0		(645	)
Recoveries		2		0			0			59			74			0			0		135			39			1			0			484			213			0		0		737
Provisions		158		415			12			283			220			17			46		1,151
Ending balance, March 31, 2020	$	1,307	$	3,557		$	283		$	2,304		$	1,714		$	270		$	472	$	9,907
Provisions (credits)																								165			799			89			(11	)		280			84		576		1,982
Ending balance, June 30, 2020																							$	1,351		$	3,942		$	360		$	2,343		$	1,689		$	337	$	1,002	$	11,024

Table of Contents

The following table presents, by loan category, the allocation of the ALLL and the related loan balance disaggregated based on the impairment methodology at ~~March 31,~~June 30, 2021 and December 31, 2020:

Construction,

Construction,

Land

State and

Land

State and

Residential

Commercial

Acquisition and

Commercial

Political

Residential

Commercial

Acquisition and

Commercial

Political

(in thousands)

Real Estate

Real Estate

Development

and Industrial

Consumer

Subdivisions

Unallocated

Total

Real Estate

Real Estate

Development

and Industrial

Consumer

Subdivisions

Unallocated

Total

March 31, 2021

June 30, 2021

Allowance for loan losses:

Individually evaluated for impairment
$ 29 $ 47 $ 0 $ 397 $ 0 $ 0 $ 0 $ 473 $ 11 $ 67 $ 0 $ 172 $ 0 $ 0 $ 0 $ 250
Collectively evaluated for impairment 1,703 4,474 516 2,206 1,219 387 1,098 11,603 1,847 4,581 493 2,311 1,177 509 1,117 12,035
Total
$ 1,732 $ 4,521 $ 516 $ 2,603 $ 1,219 $ 387 $ 1,098 $ 12,076 $ 1,858 $ 4,648 $ 493 $ 2,483 $ 1,177 $ 509 $ 1,117 $ 12,285

Loans receivable:

Individually evaluated for impairment
$ 2,083 $ 8,065 $ 67 $ 839 $ 0 $ 0 $ 0 $ 11,054 $ 1,988 $ 8,001 $ 66 $ 789 $ 0 $ 0 $ 0 $ 10,844
Collectively evaluated for impairment
196,436 278,510 56,790 263,428 82,521 46,891 0 924,576 208,505 316,238 53,593 247,439 81,459 61,774 0 969,008
Total
$ 198,519 $ 286,575 $ 56,857 $ 264,267 $ 82,521 $ 46,891 $ 0 $ 935,630 $ 210,493 $ 324,239 $ 53,659 $ 248,228 $ 81,459 $ 61,774 $ 0 $ 979,852

December 31, 2020

Allowance for loan losses:

Individually evaluated for impairment
$ 13 $ 46 $ 0 $ 357 $ 0 $ 0 $ 0 $ 416 $ 13 $ 46 $ 0 $ 357 $ 0 $ 0 $ 0 $ 416
Collectively evaluated for impairment
1,702 4,222 538 2,262 1,319 405 1,086 11,534 1,702 4,222 538 2,262 1,319 405 1,086 11,534
Total
$ 1,715 $ 4,268 $ 538 $ 2,619 $ 1,319 $ 405 $ 1,086 $ 11,950 $ 1,715 $ 4,268 $ 538 $ 2,619 $ 1,319 $ 405 $ 1,086 $ 11,950

Loans receivable:

Individually evaluated for impairment
$ 2,321 $ 8,448 $ 69 $ 897 $ 0 $ 0 $ 0 $ 11,735 $ 2,321 $ 8,448 $ 69 $ 897 $ 0 $ 0 $ 0 $ 11,735
Collectively evaluated for impairment
194,007 265,455 59,716 237,538 85,881 49,009 0 891,606 194,007 265,455 59,716 237,538 85,881 49,009 0 891,606
Total
$ 196,328 $ 273,903 $ 59,785 $ 238,435 $ 85,881 $ 49,009 $ 0 $ 903,341 $ 196,328 $ 273,903 $ 59,785 $ 238,435 $ 85,881 $ 49,009 $ 0 $ 903,341

Credit Quality Indicators – Commercial Loans

Management continuously monitors and evaluates the credit quality of FNCB’s commercial loans by regularly reviewing certain credit quality indicators. Management utilizes credit risk ratings as the key credit quality indicator for evaluating the credit quality of FNCB’s loan receivables.

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

1. Minimal Risk
2. Above Average Credit Quality
3. Average Risk
4. Acceptable Risk
5. Pass - Watch
6. Special Mention
7. Substandard - Accruing
8. Substandard - Non-Accrual
9. Doubtful
10. Loss

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

Pass – Assets rated 1 through 5 are considered pass ratings. These assets show no current or potential problems and are considered fully collectible. All such loans are evaluated collectively for ALLL calculation purposes. However, accruing loans restructured under a troubled debt restructuring (“TDRs”) that have been performing for an extended period, do not represent a higher risk of loss, and have been upgraded to a pass rating are evaluated individually for impairment.

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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.

11

~~Table of Contents~~
Substandard – Assets classified as substandard have well defined weaknesses based on objective evidence and are characterized by the distinct possibility that FNCB will sustain some loss if the deficiencies are not corrected.

Doubtful – Assets classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable and improbable based on current circumstances.

Loss – Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.

Credit Quality Indicators – Other Loans

Certain residential real estate loans, consumer loans, commercial and 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 versus non-accrual status as the credit quality indicator for these loan pools.

The following tables present the recorded investment in loans receivable by loan category and credit quality indicator at ~~March 31,~~June 30, 2021 and December 31, 2020:

Credit Quality Indicators

Credit Quality Indicators

March 31, 2021

June 30, 2021

Commercial Loans

Other Loans

Commercial Loans

Other Loans

Special

Subtotal

Accruing

Non-accrual

Subtotal

Total

Special

Subtotal

Accruing

Non-accrual

Subtotal

Total

(in thousands)

Pass

Mention

Substandard

Doubtful

Loss

Commercial

Loans

Loans

Other

Loans

Pass

Mention

Substandard

Doubtful

Loss

Commercial

Loans

Loans

Other

Loans

Residential real estate
$ 37,945 $ 570 $ 81 $ 0 $ 0 $ 38,596 $ 159,166 $ 757 $ 159,923 $ 198,519 $ 37,988 $ 478 $ 80 $ 0 $ 0 $ 38,546 $ 171,353 $ 594 $ 171,947 $ 210,493
Commercial real estate
269,119 4,712 12,744 0 0 286,575 0 0 0 286,575 307,506 4,043 12,690 0 0 324,239 0 0 0 324,239
Construction, land acquisition and development
51,097 0 0 0 0 51,097 5,760 0 5,760 56,857 48,889 0 0 0 0 48,889 4,770 0 4,770 53,659
Commercial and industrial
259,679 831 1,078 0 0 261,588 2,679 0 2,679 264,267 243,948 245 1,588 0 0 245,781 2,447 0 2,447 248,228
Consumer
0 0 0 0 0 0 82,127 394 82,521 82,521 0 0 0 0 0 0 81,181 278 81,459 81,459
State and political subdivisions
46,883 0 0 0 0 46,883 8 0 8 46,891 61,767 0 0 0 0 61,767 7 0 7 61,774
Total
$ 664,723 $ 6,113 $ 13,903 $ 0 $ 0 $ 684,739 $ 249,740 $ 1,151 $ 250,891 $ 935,630 $ 700,098 $ 4,766 $ 14,358 $ 0 $ 0 $ 719,222 $ 259,758 $ 872 $ 260,630 $ 979,852

Credit Quality Indicators

December 31, 2020

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
$ 35,839 $ 494 $ 209 $ 0 $ 0 $ 36,542 $ 158,896 $ 890 $ 159,786 $ 196,328
Commercial real estate
256,390 4,349 13,164 0 0 273,903 0 0 0 273,903
Construction, land acquisition and development
55,697 0 0 0 0 55,697 4,088 0 4,088 59,785
Commercial and industrial
233,370 961 1,104 0 0 235,435 3,000 0 3,000 238,435
Consumer
0 0 0 0 0 0 85,374 507 85,881 85,881
State and political subdivisions
48,998 0 0 0 0 48,998 11 0 11 49,009
Total
$ 630,294 $ 5,804 $ 14,477 $ 0 $ 0 $ 650,575 $ 251,369 $ 1,397 $ 252,766 $ 903,341

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded investment in these non-accrual loans was ~~$4.8~~$4.5 million and $5.6 million at ~~March 31,~~June 30, 2021 and December 31, 2020, respectively. Generally, loans are placed on non-accrual status when they become 90 days or more delinquent. Once a loan is placed on non-accrual status, it remains on non-accrual status until it has been brought current, has six 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 no0 loans past due 90 days or more and still accruing at ~~March 31,~~June 30, 2021 and December 31, 2020.

12
Table of Contents

The following tables present the delinquency status of past due and non-accrual loans at ~~March 31,~~June 30, 2021 and December 31, 2020:

March 31, 2021

June 30, 2021

Delinquency Status

Delinquency Status

0-29 Days

30-59 Days

60-89 Days

>/= 90 Days

0-29 Days

30-59 Days

60-89 Days

>/= 90 Days

(in thousands)

Past Due

Past Due

Past Due

Past Due

Total

Past Due

Past Due

Past Due

Past Due

Total

Performing (accruing) loans:

Residential real estate
$ 197,260 $ 421 $ 0 $ 0 $ 197,681 $ 209,777 $ 10 $ 31 $ 0 $ 209,818
Commercial real estate
283,516 166 0 0 283,682 321,333 0 0 0 321,333
Construction, land acquisition and development
56,857 0 0 0 56,857 53,659 0 0 0 53,659
Commercial and industrial
263,520 29 1 0 263,550 247,488 41 3 0 247,532
Consumer
81,032 814 281 0 82,127 80,354 763 64 0 81,181
State and political subdivisions
46,891 0 0 0 46,891 61,774 0 0 0 61,774
Total performing (accruing) loans
929,076 1,430 282 0 930,788 974,385 814 98 0 975,297

Non-accrual loans:

Residential real estate
214 253 0 371 838 174 176 0 325 675
Commercial real estate
1,421 0 0 1,472 2,893 1,352 0 0 1,554 2,906
Construction, land acquisition and development
0 0 0 0 0 0 0 0 0 0
Commercial and industrial
559 34 0 124 717 538 0 0 158 696
Consumer
199 42 75 78 394 166 55 52 5 278
State and political subdivisions
0 0 0 0 0 0 0 0 0 0
Total non-accrual loans
2,393 329 75 2,045 4,842 2,230 231 52 2,042 4,555

Total loans receivable
$ 931,469 $ 1,759 $ 357 $ 2,045 $ 935,630 $ 976,615 $ 1,045 $ 150 $ 2,042 $ 979,852

December 31, 2020

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:

Residential real estate
$ 194,820 $ 251 $ 159 $ 0 $ 195,230
Commercial real estate
270,059 606 0 0 270,665
Construction, land acquisition and development
59,785 0 0 0 59,785
Commercial and industrial
237,262 419 16 0 237,697
Consumer
83,486 1,485 403 0 85,374
State and political subdivisions
49,009 0 0 0 49,009
Total performing (accruing) loans
894,421 2,761 578 0 897,760

Non-accrual loans:

Residential real estate
642 39 0 417 1,098
Commercial real estate
1,484 0 0 1,754 3,238
Construction, land acquisition and development
0 0 0 0 0
Commercial and industrial
614 0 124 0 738
Consumer
114 132 96 165 507
State and political subdivisions
0 0 0 0 0
Total non-accrual loans
2,854 171 220 2,336 5,581

Total loans receivable
$ 897,275 $ 2,932 $ 798 $ 2,336 $ 903,341

13
Table of Contents

The following tables present a distribution of the recorded investment, unpaid principal balance and the related allowance for FNCB’s impaired loans, which have been analyzed for impairment under ASC 310, at ~~March 31,~~June 30, 2021 and December 31, 2020. Non-accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold are not evaluated individually for impairment and accordingly, are not included in the following tables. However, these loans are evaluated collectively for impairment as homogeneous pools in the general allowance under ASC 450. Total non-accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold that were evaluated under ASC 450 amounted to ~~$0.8~~$0.4 million and $1.4 million at ~~March 31,~~June 30, 2021and December 31, 2020, respectively.

March 31, 2021

June 30, 2021

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

(in thousands)

Investment

Balance

Allowance

Investment

Balance

Allowance

With no allowance recorded:

Residential real estate
$ 517 $ 587 $ - $ 631 $ 695 $ -
Commercial real estate
2,383 5,004 - 2,472 5,129 -
Construction, land acquisition and development
67 67 - 0 0 -
Commercial and industrial
91 91 - 398 424 -
Consumer
0 0 - 0 0 -
State and political subdivisions
0 0 - 0 0 -
Total impaired loans with no related allowance recorded
3,058 5,749 - 3,501 6,248 -

With a related allowance recorded:

Residential real estate
1,566 1,566 29 1,357 1,357 11
Commercial real estate
5,682 5,682 47 5,529 5,529 67
Construction, land acquisition and development
0 0 0 66 66 0
Commercial and industrial
748 988 397 391 609 172
Consumer
0 0 0 0 0 0
State and political subdivisions
0 0 0 0 0 0
Total impaired loans with a related allowance recorded
7,996 8,236 473 7,343 7,561 250

Total impaired loans:

Residential real estate
2,083 2,153 29 1,988 2,052 11
Commercial real estate
8,065 10,686 47 8,001 10,658 67
Construction, land acquisition and development
67 67 0 66 66 0
Commercial and industrial
839 1,079 397 789 1,033 172
Consumer
0 0 0 0 0 0
State and political subdivisions
0 0 0 0 0 0
Total impaired loans
$ 11,054 $ 13,985 $ 473 $ 10,844 $ 13,809 $ 250

December 31, 2020

Unpaid

Recorded

Principal

Related

(in thousands)

Investment

Balance

Allowance

With no allowance recorded:

Residential real estate
$ 859 $ 957 $ -
Commercial real estate
2,729 5,311 -
Construction, land acquisition and development
69 69 -
Commercial and industrial
5 5 -
Consumer
0 0 -
State and political subdivisions
0 0 -
Total impaired loans with no related allowance recorded
3,662 6,342 -

With a related allowance recorded:

Residential real estate
1,462 1,462 13
Commercial real estate
5,719 5,719 46
Construction, land acquisition and development
0 0 0
Commercial and industrial
892 1,130 357
Consumer
0 0 0
State and political subdivisions
0 0 0
Total impaired loans with a related allowance recorded
8,073 8,311 416

Total impaired loans:

Residential real estate
2,321 2,419 13
Commercial real estate
8,448 11,030 46
Construction, land acquisition and development
69 69 0
Commercial and industrial
897 1,135 357
Consumer
0 0 0
State and political subdivisions
0 0 0
Total impaired loans
$ 11,735 $ 14,653 $ 416

14
Table of Contents

The following table presents the average balance and interest income by loan category recognized on impaired loans for the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

2021

2020

Average

Interest

Average

Interest

Average

Interest

Average

Interest

Average

Interest

Average

Interest

(in thousands)

Balance

Income (1)

Balance

Income (1)

Balance

Income (1)

Balance

Income (1)

Balance

Income (1)

Balance

Income (1)

Residential real estate
$ 2,090 $ 18 $ 2,762 $ 22 $ 2,094 $ 17 $ 2,274 $ 20 $ 2,092 $ 35 $ 2,422 $ 40
Commercial real estate
8,284 57 11,321 68 8,183 56 10,980 70 8,233 113 11,150 138
Construction, land acquisition and development
68 1 75 1 66 1 73 1 67 2 74 2
Commercial and industrial
861 2 1,014 0 929 2 1,236 6 895 4 1,125 6
Consumer
0 0 0 0 0 0 282 1 0 0 237 3
State and political subdivisions
0 0 0 0 0 0 0 0 0 0 0 0
Total impaired loans
$ 11,303 $ 78 $ 15,172 $ 91 $ 11,272 $ 76 $ 14,845 $ 98 $ 11,287 $ 154 $ 15,008 $ 189

(1) Interest income represents income recognized on performing TDRs.

The additional interest income that would have been earned on non-accrual and restructured loans had these loans performed in accordance with their original terms approximated ~~$60~~$55 thousand and $115 thousand for the three and sixmonths ended ~~March 31,~~June 30, 2021and ~~$111~~$94 thousand and $205 thousand for the three and sixmonths ended ~~March 31, 2020.~~June 30, 2020, respectively.

Troubled Debt Restructured Loans

TDRs were ~~$7.6~~$7.2 million and $7.7 million at ~~March 31,~~June 30, 2021 and December 31, 2020, respectively. Accruing and non-accruing TDRs were ~~$7.0~~$6.8 million and ~~$0.6~~$0.4 million, respectively, at ~~March 31,~~June 30, 2021, and $7.0 million and $0.7 million, respectively, at December 31, 2020. Approximately $188 thousand and $197 thousand in specific reserves were established for TDRs at ~~March 31,~~June 30, 2021 and December 31, 2020, respectively. FNCB was not committed to lend additional funds to any loan classified as a TDR at ~~March 31,~~June 30, 2021.

The modification of the terms of loans classified as TDRs may include one or a combination of the following changes, 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.

There were no0 loans modified as TDRs during the three and sixmonths ended ~~March 31, 2021~~June 30, 2021. ~~and~~ ~~2020.~~There were three commercial and industrial loans and one residential loan modified as TDRs during the nothree and six months ended June 30, 2020. The three commercial and industrial loans were modified under forbearance agreements and had an aggregate pre- and post-modification recorded investment of $196 thousand. The one residential mortgage loan that was modified as a TDR involved an extension of terms and the loan had a pre-and post-modification balance of $88 thousand. There were 0 loans modified as a TDR within the previous 12 months that subsequently defaulted, defined as 90 days or more past due, during the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020.

Residential Real Estate Loan ~~Foreclosures/ Subsequent Event~~Foreclosures

~~There were~~ ~~two~~ ~~residential real estate loans with a total recorded investment of $286~~ ~~thousand, in~~During the ~~process of foreclosure at March 31, 2021~~three~~. There were~~ no ~~residential real estate properties in OREO at~~ and ~~March 31, 2021.~~ six~~Additionally, at~~ months ended ~~March 31,~~June 30, 2021, FNCB ~~was negotiating~~obtained a deed in lieu of foreclosure for ~~one~~ ofa residential mortgage with a recorded investment of $138 thousand. FNCB accepted an offer of $205 thousand and the property went under an agreement of sale with closing anticipated in the third quarter of 2021. FNCB transferred the property to OREO at the selling price, less the estimated cost to sell, of $178 thousand and recorded a positive valuation adjustment of $40 thousand which is included in non-interest income for the three and six month ended June 30, 2021. Additionally, there was one residential mortgage loan with a recorded investment of $94 thousand that was in the process of ~~foreclosure. This property had a recorded investment of $133 thousand~~foreclosure at ~~March 31,~~June 30, 2021.~~The deed~~
There were 0 residential real estate properties foreclosed upon during the three and six months ended June 30, 2020 or included in ~~lieu of foreclosure was finalized and the property transferred to~~ OREO inat ~~April 2021.~~ June 30, 2020.

15
Table of Contents

Note 5. Income Taxes

The following table presents a reconciliation between the effective income tax expense and the income tax expense that would have been provided at the federal statutory tax rate of 21.0% for the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020, respectively.

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2021

2020

2021

2020

2021

2020

(dollars in thousands)

Amount

%
Amount

%
Amount

%

Amount

%

Amount

%

Amount

%

Provision at statutory tax rates
$ 1,431 21.00 % $ 528 21.00 % $ 1,336 21.00 % $ 1,013 21.00 % $ 2,767 21.00 % $ 1,541 21.00 %
Add (deduct):

Tax effects of tax free interest income
(183 ) (2.68 )% (106 ) (4.22 )% (181 ) (2.85 )% (165 ) (3.42 )% (364 ) (2.76 )% (271 ) (3.69 )%
Non-deductible interest expense
11 0.17 % 5 0.19 % 12 0.19 % 4 0.09 % 23 0.17 % 9 0.12 %
Bank-owned life insurance
(114 ) (1.68 )% (27 ) (1.07 )% (31 ) (0.49 )% (25 ) (0.52 )% (145 ) (1.10 )% (52 ) (0.71 )%
Gains on equity securities (76 ) (1.12 )% (3 ) (0.12 )% (8 ) (0.12 )% 0 0 (84 ) (0.64 )% 0 0
Other items, net
(88 ) �� (1.29 )% 55 2.19 % 3 0.05 % (22 ) (0.47 )% (85 ) (0.64 )% 30 0.41 %
Income tax provision
$ 981 14.40 % $ 452 17.97 % $ 1,131 17.78 % $ 805 16.68 % $ 2,112 16.03 % $ 1,257 17.13 %

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. Management performed an evaluation of FNCB’s deferred tax assets at ~~March 31,~~June 30, 2021taking 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. There was no0 valuation allowance for deferred tax assets recorded at ~~March 31,~~June 30, 2021 and December 31, 2020.

Note 6. 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 sixmonths ended ~~March 31,~~June 30, 2021 and 2020.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

2021

2020

2021

2020

2021

2020

Balance, beginning of period
$ 98,935 $ 77,897 $ 102,498 $ 82,818 $ 98,935 $ 77,896
Additions, new loans and advances
8,210 17,553 41,469 13,143 49,679 30,696
Repayments
(4,647 ) (12,632 ) (19,810 ) (2,388 ) (24,457 ) (15,019 )
Other (1)
(23,657 ) 0 (23,657 ) 0
Balance, end of period
$ 102,498 $ 82,818 $ 100,500 $ 93,573 $ 100,500 $ 93,573

(1) Other represents loans to related parties that ceased being related parties during the year

At ~~March 31,~~June 30, 2021there were no0 loans ~~made~~ to directors, executive officers and their related parties that were not performing in accordance with the original terms of the loan agreements.

Deposits from directors, executive officers and their related parties held by the Bank at ~~March 31,~~June 30, 2021 and December 31, 2020 amounted to $~~148.1~~163.0 million and $146.2 million, respectively. Interest paid on the deposits amounted to ~~$92~~$180 thousand and ~~$120~~$270 thousand for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, respectively.

In the course of its operations, FNCB acquires goods and services from, and transacts business with, various companies of related parties, which include, but are not limited to, employee health insurance, fidelity bond and errors and omissions insurance, legal services, rent and repair of repossessed automobiles for resale. FNCB recorded payments to related parties for goods and services of ~~$362~~$346 thousand and ~~$490~~$708 thousand for the three and sixmonths ended ~~March 31,~~June 30, 2021, respectively, and $223 thousand and $713 thousand for the respective periods of ~~2020,~~2020. ~~respectively.~~

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Note 7. Commitments and Contingencies

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 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 consolidated statements of financial condition. As of ~~March 31,~~June 30, 2021, ROU assets and lease liabilities were ~~$3.3~~$3.2 million and $3.5 million, respectively. FNCB entered into three new automobile leases during the ~~three~~six months ended ~~March 31,~~June 30, 2021 with a ROU asset and corresponding lease liability of $46 thousand and $42 thousand, respectively.

Operating lease expense associated with bank branches and office space is included in occupancy expense, while operating lease expenses associated with automobiles and office equipment are included in equipment expense in the consolidated statements of income. Total rental expense under leases amounted to ~~$97~~$191 thousand and ~~$107~~$216 thousand, respectively, at ~~March 31,~~June 30, 2021 and 2020.

The following table summarizes the maturity of remaining operating lease liabilities as of ~~March 31,~~June 30, 2021:

(in thousands)

March 31, 2021

June 30, 2021

2021
$ 272 $ 183
2022
397 397
2023
366 366
2024
330 330
2025
335 335
2026 and thereafter
2,743 2,742
Total lease payments
4,443 4,353
Less: imputed interest
903 878
Present value of operating lease liabilities
$ 3,540 $ 3,475

The following table presents other information related to our operating leases:

(dollars in thousands)

March 31, 2021

June 30, 2021

Weighted-average remaining lease term

13.09 years

12.9 years

Weighted-average discount rate
3.32 % 3.31 %
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases
$ 108 $ 215

Litigation

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.

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Note 8. Stock Compensation ~~Plans~~Plans/Subsequent Event

FNCB has a Long-Term Incentive Compensation Plan (“LTIP”) for directors, executives and key employees. The LTIP authorizes up to 1,200,000 shares of common stock for issuance and provides the Board of Directors with the authority to offer several different types of long-term incentives, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares. During the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, the Board of Directors granted 66,065 and 75,924 shares of restricted stock, respectively, under the LTIP. At ~~March 31,~~June 30, 2021, there were ~~690,324~~697,765 shares of common stock available for award under the LTIP. For the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, stock-based compensation expense, which is included in salaries and benefits expense in the consolidated statements of income, totaled $80178 thousand and ~~$62~~$143 thousand, respectively. Total unrecognized compensation expense related to unvested restricted stock awards was ~~$1.3~~$1.2 million and ~~$1.2~~$1.1 million at ~~March 31,~~June 30, 2021 and 2020, respectively. Unrecognized compensation expense related to unvested shares of restricted stock is expected to be recognized over a weighted-average period of ~~3.95~~3.75 years.
Subsequent to June 30, 2021, on July 1, 2021, 2,062 shares of FNCB's common stock were granted under the LTIP to each of the Bank's nine non-employee directors, or 18,558 shares in aggregate. The shares of stock immediately vested to each director upon grant, and the fair value per share on the grant date was $7.28. Director fees totaling $150 thousand associated with this grant will be recognized on July 1, 2021.

The following table summarizes the activity related to FNCB’s unvested restricted stock awards during the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

2021

2020

2021

2020

2021

2020

Weighted-

Weighted-

Weighted-

Weighted-

Weighted-

Weighted-

Average

Average

Average

Average

Average

Average

Restricted

Grant Date

Restricted

Grant Date

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

Shares

Fair Value

Shares

Fair Value

Unvested restricted stock awards:

Total outstanding, beginning of period
159,913 $ 7.07 128,150 $ 7.76 225,978 $ 7.34 201,415 $ 7.14 159,913 $ 7.07 128,150 $ 7.76
Awards granted
66,065 7.98 75,924 6.07 0 0 0 0 66,065 7.98 75,924 6.07
Forfeitures
0 0 (2,659 ) 6.24 (7,443 ) 7.38 0 0 (7,443 ) 7.38 (2,659 ) 6.24
Vestings
0 0 0 0 (44,238 ) 7.20 (31,783 ) 7.69 (44,238 ) 7.20 (31,783 ) 7.69
Total outstanding, end of period
225,978 $ 7.34 201,415 $ 7.14 174,297 $ 7.37 169,632 $ 7.04 174,297 $ 7.37 169,632 $ 7.04

Note 9. Regulatory Matters/Subsequent Events

FNCB’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to FNCB. Bank regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. For the three and sixmonths ended ~~March 31,~~June 30, 2021 ~~and~~ ~~2020,~~ cash dividends declared and paid by FNCB were $0.060 per share and $0.120 per share, respectively, and $0.055 per share ~~respectively.~~ and $0.110 per share, respectively, for the three and six months ended June 30, 2020. FNCB offers a Dividend Reinvestment and Stock Purchase Plan (“DRP”) to its shareholders. For the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020, d~~ividend~~ dividend reinvestment shares were purchased in open market transactions, however, shares under the optional cash purchase feature of the DRP were issued from authorized but unissued common shares. Common shares issued under the DRP for the three and sixmonths ended ~~March 31,~~June 30, 2021, totaled 3,038 and ~~2020~~ ~~totaled 3,207~~6,245, respectively, and ~~2,842, respectively.~~2,574 and 5,416, respectively for the same periods in 2020. Subsequent to ~~March 31,~~June 30, 2021, on ~~April 28,~~July 29, 2021,, FNCB declared a cash dividend for the ~~second~~third quarter of 2021 of ~~$0.060~~$0.075 per share, which is payable on ~~June~~September 15, 2021~~, 2021~~ to shareholders of record as of ~~June~~September 1,2021.

On January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program under which up to 975,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier than February 3, 2021 and expiring December 31, 2021, pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Under the program, shares ~~will be~~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 is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue at any time that management determines additional repurchases are no longer warranted. As of ~~March 31,~~June 30, 2021, FNCB repurchased ~~8,188~~193,530 shares at a weighted-average price per share of ~~$6.96.~~$7.18. Subsequent to ~~March 31,~~June 30, 2021, and for the period ~~April~~July 1, 2021 through ~~April~~July 30, 2021, FNCB repurchased an additional ~~17,889~~ 137,029shares at a weighted-average price per share of ~~$6.94.~~$7.25.

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. 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 ~~March 31,~~June 30, 2021 and December 31, 2020, that FNCB and the Bank meet all applicable capital adequacy requirements.

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Current quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Total capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). The following tables present summary information regarding the Bank’s risk-based capital and related ratios at ~~March 31,~~June 30, 2021 and December 31, 2020:

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

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

Amount

Ratio

Ratio

Ratio

Ratio

March 31, 2021

June 30, 2021

Total capital (to risk-weighted assets)
$ 155,242 16.26 % 8.00 % 10.50 % 10.00 % $ 161,396 15.79 % 8.00 % 10.50 % 10.00 %

Tier I capital (to risk-weighted assets)
143,299 15.01 % 6.00 % 8.50 % 8.00 % 148,626 �� 14.54 % 6.00 % 8.50 % 8.00 %

Tier I common equity (to risk-weighted assets)
143,299 15.01 % 4.50 % 7.00 % 6.50 % 148,626 14.54 % 4.50 % 7.00 % 6.50 %

Tier I capital (to average assets)
143,299 9.88 % 4.00 % 4.00 % 5.00 % 148,626 9.90 % 4.00 % 4.00 % 5.00 %

Total risk-weighted assets
954,662 1,022,134

Total average assets
1,450,133 1,501,242

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, 2020

Total capital (to risk-weighted assets)
$ 149,173 15.79 % 8.00 % 10.50 % 10.00 %

Tier I capital (to risk-weighted assets)
137,356 14.54 % 6.00 % 8.50 % 8.00 %

Tier I common equity (to risk-weighted assets)
137,356 14.54 % 4.50 % 7.00 % 6.50 %

Tier I capital (to average assets)
137,356 9.57 % 4.00 % 4.00 % 5.00 %

Total risk-weighted assets
944,546

Total average assets
1,434,776

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Note 10. Fair Value Measurements

In determining fair value, FNCB uses various valuation approaches, including market, income and cost approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of FNCB. Unobservable inputs reflect FNCB’s knowledge about the assumptions the market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

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

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

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

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

A description of the valuation methodologies used for assets recorded at fair value is set forth below.

Available-for-Sale Debt Securities

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, private collateralized mortgage obligations and asset-backed securities are obtained by FNCB from a nationally-recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing (Level 2 inputs), to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider observable data that may include, 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 ~~March 31,~~June 30, 2021, FNCB owned 2125 corporate debt securities with an aggregate amortized cost and fair value of ~~$25.6~~$28.8 million and ~~$26.3~~$29.7 million, respectively. At ~~March 31,~~June 30, 2021, the market for 9 12corporate debt securities with an amortized cost and fair value of ~~$13.8~~$16.0 million and ~~$14.3~~$16.6 million, respectively, was not active, based on transaction criteria for similar instruments. FNCB obtained valuations for these securities from a third-party service provider that prepared the valuations using a discounted cash flow approach. Management takes measures to validate the service providers’ analysis and is actively involved in the valuation process, including reviewing and verifying the assumptions 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 inputs to be unobservable Level 3 inputs because they are based on estimates about the assumptions market participants would use in pricing this type of asset and developed based on the best information available under the circumstances rather than on observable inputs. As it relates to fair value measurements, once each issuer is categorized and the forecasted default rates have been applied, the expected cash flows are modeled using the variables described above. Discount rates ranging from ~~3.50%~~3.46% to ~~5.00%~~4.46% were applied to the expected cash flows to estimate fair value. 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 FNCB's third-party service provider.

Equity Securities

The estimated fair values of equity securities are determined by obtaining quoted prices on nationally recognized exchanges (Level 1 inputs).

Derivative Contracts

FNCB's derivative liabilities are reported at fair value 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, LIBOR rates, forward rates and rate volatility. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial assets and liabilities that were measured at fair value on a recurring basis at ~~March 31,~~June 30, 2021, and December 31, 2020, and the fair value hierarchy of the respective valuation techniques utilized by FNCB to determine the fair value:

Fair Value Measurements at March 31, 2021

Fair Value Measurements at June 30, 2021

Significant

Significant

Significant

Significant

Quoted Prices

Other

Other

Quoted Prices

Other

Other

in Active Markets

Observable

Unobservable

in Active Markets

Observable

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)

Financial assets:
Available-for-sale debt securities:

U.S. Treasury securities $ 1,916 $ 0 $ 1,916 $ 0 $ 5,124 $ 0 $ 5,124 $ 0
Obligations of state and political subdivisions
205,628 0 205,628 0 215,389 0 215,389 0
U.S. government/government-sponsored agencies:

Collateralized mortgage obligations - residential
106,430 0 106,430 0 107,000 0 107,000 0
Collateralized mortgage obligations - commercial
3,803 0 3,803 0 3,821 0 3,821 0
Mortgage-backed securities
16,367 0 16,367 0 19,976 0 19,976 0
Private collateralized mortgage obligations
37,512 0 37,512 0 41,247 0 41,247 0
Corporate debt securities
26,272 0 11,938 14,334 29,688 0 13,079 16,609
Asset-backed securities
9,468 0 9,468 0 10,562 0 10,562 0
Subtotal available-for-sale debt securities
407,396 0 393,062 14,334 432,807 0 416,198 16,609
Equity securities, at fair value
4,267 4,267 0 0 4,303 4,303 0 0
Derivative assets 262 0 262 0 163 0 163 0
Total $ 411,925 $ 4,267 $ 393,324 $ 14,334 $ 437,273 $ 4,303 $ 416,361 $ 16,609
��
Financial liabilities:
Derivative liabilities $ 175 $ 0 $ 175 $ 0 $ 91 $ 0 $ 91 $ 0
Total $ 175 $ 0 $ 175 $ 0 $ 91 $ 0 $ 91 $ 0

Fair Value Measurements at December 31, 2020

Significant

Significant

Quoted Prices

Other

Other

in Active Markets

Observable

Unobservable

for Identical Assets

Inputs

Inputs

(in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

Financial assets:

Available-for-sale debt securities:

Obligations of state and political subdivisions
$ 205,828 $ 0 $ 205,828 $ 0
U.S. government/government-sponsored agencies:

Collateralized mortgage obligations - residential
56,972 0 56,972 0
Collateralized mortgage obligations - commercial
3,904 0 3,904 0
Mortgage-backed securities
13,026 0 13,026 0
Private collateralized mortgage obligations
38,199 0 38,199 0
Corporate debt securities
24,580 0 8,156 16,424
Asset-backed securities
7,526 0 7,526 0
Subtotal available-for-sale debt securities
350,035 0 333,612 16,424
Equity securities, at fair value
3,026 3,026 0 0
Derivative assets
23 0 23 0
Total
$ 353,084 $ 3,026 $ 333,635 $ 16,424

Financial liabilities:

Derivative liabilities
$ 143 $ 0 $ 143 $ 0
Total
$ 143 $ 0 $ 143 $ 0

During the ~~three~~six months ended ~~March 31,~~June 30, 2021, 4four corporate debt securities were transferred from the Level 3 hierarchy to Level 2. Previously, the market for ~~theses~~these securities was not active and management obtained fair values from an independent third party that utilized a discounted cash flow model. ~~During the~~ ~~three~~ ~~months ended~~ ~~March 31, 2021,~~ ~~the~~The market for these securities became active and atbeginning in the ~~March 31,~~ first quarter of 2021,management was able to obtain their fair values from the independent pricing service used to price the remainder of the portfolio. There were no transfers between levels within the fair value hierarchy during the ~~three~~six months ended ~~March~~ ~~31,~~June 30, 2020.

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The following table presents a reconciliation and statement of operations classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which consisted entirely of corporate debt securities, for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020.

Fair Value Measurements
Fair Value Measurements

Fair Value Measurements

Using Significant Unobservable Inputs (Level 3)
Using Significant Unobservable Inputs (Level 3)

Using Significant Unobservable Inputs (Level 3)

Corporate Debt Securities

Corporate Debt Securities

For the Three Months Ended March 31,

For the Six Months Ended June 30,

(in thousands)

2021

2020

2021

2020

Balance at January 1,
$ 16,424 $ 5,150 $ 16,424 $ 5,150
Additions
1,750 3,000 4,000 8,800
Redemptions
0 0 0 0
Transfer to Level 2 (3,947 ) 0 (3,947 ) 0
Sales
0 0 0 0
Total gains or losses (realized/unrealized):

Included in earnings
0 0 0 0
Included in other comprehensive income
107 (470 ) 132 (2,237 )
Balance at March 31,
$ 14,334 $ 7,680
Balance at June 30,
$ 16,609 $ 11,713

Assets Measured at Fair Value on a Non-Recurring Basis

The following tables present assets and liabilities measured at fair value on a non-recurring basis at ~~March 31,~~June 30, 2021 and December 31, 2020, 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.

March 31, 2021

June 30, 2021

Fair Value Measurement

Quantitative Information

Fair Value Measurement

Quantitative Information

Recorded

Valuation

Fair

Valuation

Unobservable

Value/

Recorded

Valuation

Fair

Valuation

Unobservable

Value/

(in thousands)

Investment

Allowance

Value

Technique

Inputs

Range

Investment

Allowance

Value

Technique

Inputs

Range

Impaired loans - collateral dependent
$ 4,664 $ 444 $ 4,220
Appraisal of collateral

Selling cost
10.0 % $ 4,677 $ 221 $ 4,456
Appraisal of collateral

Selling cost
10.0 %
Impaired loans - other
6,390 29 6,361
Discounted cash flows

Discount rate
3.00% - 8.75% 6,167 29 6,138
Discounted cash flows

Discount rate
3.00% - 8.75%
Other real estate owned 58 0 58 Appraisal of collateral Selling cost 10.0 % 196 (40 ) 236
Appraisal of collateral

Selling cost
10.0 %

December 31, 2020

Fair Value Measurement

Quantitative Information

Recorded

Valuation

Fair

Valuation

Unobservable

Value/

(in thousands)

Investment

Allowance

Value

Technique

Inputs

Range

Impaired loans - collateral dependent
$ 4,244 $ 218 $ 4,026
Appraisal of collateral

Selling cost
10.0 %
Impaired loans - other
7,491 198 7,293
Discounted cash flows

Discount rate
3.00% - 8.75%
Other real estate owned
58 0 58
Appraisal of collateral

Selling cost
10.0 %

The fair value of collateral-dependent impaired loans is determined through independent appraisals or other reasonable offers, which generally include various Level 3 inputs which are not identifiable. Management reduces the appraised value by the estimated costs to sell the property and may ~~make adjustments to~~adjust the appraised values as necessary to consider any declines in real estate values since the time of the appraisal. For impaired loans that are not collateral-dependent, fair value is determined using the discounted cash flow method. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance or is charged off. The amount shown is the balance of impaired loans, net of any charge-offs and the related allowance for loan losses.

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

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The following table summarizes the estimated fair values of FNCB’s financial instruments using an exit price notion at ~~March 31,~~June 30, 2021and at December 31, 2020.  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

March 31, 2021

December 31, 2020

Fair Value

June 30, 2021

December 31, 2020

(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
$ 98,554 $ 98,554 $ 155,811 $ 155,811
Level 1
$ 55,942 $ 55,942 $ 155,811 $ 155,811
Available-for-sale debt securities

See previous table
407,396 407,396 350,035 350,035
See table on page 21
432,807 432,807 350,035 350,035
Equity securities

Level 1
4,267 4,267 3,026 3,026
Level 1
4,303 4,303 3,026 3,026
Restricted stock

Level 2
1,149 1,149 1,745 1,745
Level 2
1,099 1,099 1,745 1,745
Loans held for sale

Level 2
267 267 2,107 2,107
Level 2
642 642 2,107 2,107
Loans, net

Level 3
919,867 924,256 889,152 891,880
Level 3
964,253 967,108 889,152 891,880
Accrued interest receivable

Level 2
4,567 4,567 4,286 4,286
Level 2
4,485 4,485 4,286 4,286
Equity securities without readily determinable fair values Level 3 500 500 500 500
Level 3
500 500 500 500
Servicing rights Level 3 331 615 324 479
Level 3
300 557 324 479
Derivative assets Level 2 262 262 23 23
Level 2
163 163 23 23

Financial liabilities

Deposits

Level 2
1,322,828 1,323,560 1,287,448 1,288,567
Level 2
1,338,178 1,338,593 1,287,448 1,288,567
Borrowed funds

Level 2
10,310 10,310 10,310 10,310
Level 2
10,310 10,310 10,310 10,310
Accrued interest payable

Level 2
99 99 108 108
Level 2
87 87 108 108
Derivative liabilities Level 2 175 175 135 143
Level 2
91 91 135 143

Note 1111.. Earnings per Share

For FNCB, the numerator of both the basic and diluted earnings per share of common stock is net income available to common shareholders. The weighted-average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common share equivalents utilizing the treasury stock method. For the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020, common share equivalents consisted entirely of incremental shares of unvested restricted stock.

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands, except share data)

2021

2020

2021

2020

2021

2020

Net income
$ 5,833 $ 2,063 $ 5,229 $ 4,021 $ 11,062 $ 6,084

Basic weighted-average number of common shares outstanding
20,242,262 20,172,498 20,222,216 20,191,527 20,232,183 20,182,012
Plus: Common share equivalents
11,344 4,067 10,478 0 10,911 2,034
Diluted weighted-average number of common shares outstanding
20,253,606 20,176,565 20,232,694 20,191,527 20,243,094 20,184,046

Income per common share:

Basic
$ 0.29 $ 0.10 $ 0.26 $ 0.20 $ 0.55 $ 0.30
Diluted
$ 0.29 $ 0.10 $ 0.26 $ 0.20 $ 0.55 $ 0.30

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Note 12. Other Comprehensive Income

The following table summarizes the reclassifications out of accumulated other comprehensive income for the three and six months ended ~~March 31,~~June 30, 2021 and 2020, comprised entirely of unrealized gains and losses on available-for-sale debt securities:

For the Three Months Ended March 31, 2021

For the Three Months Ended June 30, 2021

For the Six Months Ended June 30, 2021
(in thousands)

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Consolidated Statements of Income

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Consolidated Statements of Income

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Consolidated Statements of Income
Available-for-sale debt securities:

Reclassification adjustment for net gains reclassified into net income
$ (213 )
Net gain on the sale of available-for-sale debt securities
$ 0
Net gain on the sale of available-for-sale debt securities
$ (213 )
Net gain on the sale of available-for-sale debt securities
Taxes
45
Income taxes
0
Income taxes
45
Income taxes
Net of tax amount
$ (168 ) $ 0 $ (168 )

For the Three Months Ended March 31, 2020

For the Three Months Ended June 30, 2020

For the Six Months Ended June 30, 2020
(in thousands)

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Consolidated Statements of Income

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Consolidated Statements of Income

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Consolidated Statements of Income
Available-for-sale debt securities:

Reclassification adjustment for net gains reclassified into net income
$ (149 )
Net gain on the sale of available-for-sale debt securities
$ (922 )
Net gain on the sale of available-for-sale debt securities
$ (1,071 )
Net gain on the sale of available-for-sale debt securities
Taxes
32
Income taxes
193
Income taxes
225
Income taxes
Net of tax amount
$ (117 ) $ (729 ) $ (846 )

The following table summarizes the changes in accumulated other comprehensive income, net of tax for the three and sixmonths ended ~~March 31,~~June 30, 2021 and 2020:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

2021

2020

2021

2020

2021

2020

Balance, beginning of period
$ 13,886 $ 3,056 $ 8,299 $ 6,351 $ 13,886 $ 3,056
Other comprehensive (loss) income before reclassifications
(5,419 ) 3,412
Other comprehensive income (loss) before reclassifications
2,898 5,157 (2,521 ) 8,569
Amount reclassified from accumulated other comprehensive income
(168 ) (117 ) 0 (729 ) (168 ) (846 )
Net other comprehensive (loss) income during the period
(5,587 ) 3,295
Net other comprehensive income (loss) during the period
2,898 4,428 (2,689 ) 7,723
Balance, end of period
$ 8,299 $ 6,351 $ 11,197 $ 10,779 $ 11,197 $ 10,779

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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, 2020 for FNCB Bancorp, Inc. In addition, please read this section in conjunction with the consolidated financial statements and notes to consolidated financial statements contained elsewhere herein.

FNCB 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 17 full-service branch offices within its primary market area, 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 filings with the Securities and Exchange Commission (“SEC”), in our reports to shareholders, and in our other communications, which are made in good faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to FNCB’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond our control). The words “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “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: the effect of the novel Coronavirus Disease 2019 ("COVID-19") pandemic on FNCB and its customers, the Commonwealth of Pennsylvania and the United States, related to the economy and overall financial stability; government and regulatory responses to the COVID-19 pandemic; government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including, but not limited to, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Tax Cuts and Jobs Act; political instability; the ability of FNCB to manage credit risk; weakness in the economic environment, in general, and within FNCB’s market area; the deterioration of one or a few of the commercial real estate loans with relatively large balances 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 ALLL is not sufficient to absorb actual losses or if increases to the ~~ALLL~~allowance for loan and lease losses ("ALLL") 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 other-than-temporary 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 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 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 act as a source of financial and managerial strength for the 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 violation of laws regarding privacy, information security and protection of personal information or another incident involving personal, confidential or proprietary information of individuals; any rulemaking changes implemented by the Consumer Financial Protection Bureau; non-compliance with the Paycheck Protection rules and regulations; inability to attract and retain its highest performing employees due to potential limitations on incentive compensation contained in proposed federal agency rulemaking; any future increases in FNCB Bank’s FDIC deposit insurance premiums and 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 documents that FNCB periodically files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2020 and Quarterly Report on Form 10-Q for the period ended March 31, 2021.

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

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

FNCB’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Management has identified the policies on the determination of the ~~allowance~~ALLL, the valuation of securities and evaluation of securities for ~~loan and lease losses (“ALLL”), securities’ valuation and~~ impairment, ~~evaluation,~~ the valuation of other real estate owned (“OREO”) and income taxes to be critical, as management is required to make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.
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The judgments used by management in applying the critical accounting policies discussed below may be affected by changes and/or deterioration in the economic environment, which may impact future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the ALLL in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in FNCB’s investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to impairment losses.

Allowance for Loan and Lease Losses

Management evaluates the credit quality of FNCB’s loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ALLL on a quarterly basis. The ALLL is established through a provision for loan losses charged to earnings and is maintained at a level management considers adequate to absorb estimated probable losses inherent in the loan portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ALLL, while recoveries of amounts previously charged off are credited to the ALLL.

Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, qualitative factors, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL. Additionally, the ALLL is determined, in part, by the composition and size of the loan portfolio.

The ALLL consists of two components, a specific component and a general component. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted 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 non-accrual status above the $100 thousand loan relationship threshold and all loans considered troubled debt restructurings (“TDRs”) are classified as impaired.

See Note 4, ~~“Loans/Subsequent Event”~~“Loans” of the notes to consolidated financial statements included in Item 1 hereof for additional information about the ALLL.

Securities Valuation and Evaluation for Impairment

Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (Level 1) or quoted prices for similar assets or models using inputs that are observable, either directly or indirectly (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of observable inputs or if markets are illiquid, valuation techniques are used to determine fair value of any investments that require inputs that are both unobservable and significant to the fair value measurement (Level 3). For Level 3 inputs, valuation techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on FNCB’s financial condition or results of operations. See Note 3, “Securities” and Note 10, “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, management evaluates individual investment securities in an unrealized loss position for other than temporary impairment (“OTTI”). The evaluation for OTTI requires the use of various assumptions, including but not limited to, the length of time an investment’s fair value is less than book value, the severity of the investment’s decline, any credit deterioration of the issuer, whether management intends to sell the security, and whether it is more-likely-than-not that FNCB will be required to sell the security prior to recovery of its amortized cost basis. Debt investment securities deemed to have OTTI are written down by the impairment related to the estimated credit loss, and the non-credit related impairment loss is recognized in other comprehensive income. FNCB did not recognize any OTTI charges on investment securities for the three and six months ended ~~March 31,~~June 30, 2021 and 2020 within the consolidated statements of income.

Refer to Note 3, “Securities,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about valuation of securities.

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Other Real Estate Owned

OREO consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a loan, and bank premises that are no longer used for operation or for future expansion. OREO is held for sale and is initially recorded at fair value less estimated 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 estimated cost to sell. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed agreements of sale, unless management determines that conditions exist that warrant an adjustment to the value. Costs relating to the development and improvement of the OREO properties may be capitalized; holding period costs and any subsequent changes to the valuation allowance are charged to expense as incurred.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in FNCB’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our consolidated financial condition or results of operations.

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

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 ~~March 31,~~June 30, 2021 and December 31, 2020, 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 5, “Income 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,” of the notes to consolidated financial statements included in Item 1 hereof for information about new authoritative accounting guidance adopted by FNCB ~~during the three months ended March 31,~~as of June 30, 2021, as well as new accounting guidance issued, but not previously reported, that will be adopted by FNCB in future periods.

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Impact of the COVID-19 pandemic

On December 27, 2020, another COVID-19 relief bill was signed into law that extended and modified several provisions of the PPP to include an additional allocation of $284 billion in funding. On January 19, 2021, FNCB began originating additional PPP under this round of funding. The SBA continued to accept new applications through May 31, 2021. During the six months ended June 30, 2021, FNCB had generated and received SBA approval and funding for 679 PPP loans totaling $76.3 million and received $3.6 million in related loan origination fees associated with this funding, which has been deferred and will be recognized upon forgiveness or repayment. During the six months ended June 30, 2021, FNCB received forgiveness for PPP loans totaling $69.1 million, with $2.3 million in PPP loan origination fees, net of loan origination costs, recognized into interest income upon forgiveness. PPP loans outstanding at June 30, 2021 were $85.8 million. FNCB expects to apply and receive forgiveness for the majority of these loans by the end of 2021.
During the first ~~quarter~~half of 2021, ~~effects from the COVID-19 pandemic continue to impact national, regional and local economies. However, as restrictions are slowly lifted, the Unites States economy has begun to recover and with the~~widespread availability and distribution of vaccines ~~continued improvement in~~has led to lifting of restrictions, reopening of the economy and improving economic ~~activity is anticipated for~~growth across the ~~remainder of 2021.~~United States and more specifically within our market area. In early April 2021, the Governor of Pennsylvania reduced some of the restrictions on certain businesses, primarily restaurants and hospitality-related businesses. However, ~~working remotely is strongly encouraged~~lingering effects from the COVID-19 pandemic, including the effects of variants, such as the Delta variant, continue to impact employment and ~~businesses with in-person operations are subject to CDC~~supply-chains affecting national, regional and ~~Commonwealth of Pennsylvania guidance.~~
local economies. FNCB branches are open, and while fully operational, ~~are still operating under the pandemic preparedness plan.~~ FNCB continues to follow CDC and Commonwealth guidance and take additional precautions to ensure the safety of its customers and its employees. ~~Additionally,~~Specifically, plexiglass shields are utilized in teller and personal banker areas and 6 feet social distancing signage remains in place. Fully-vaccinated customers and employees, as of the date of this Report, are allowed to enter bank premises without face masks. FNCB ~~has worked with local health care providers~~requires employees who are not fully-vaccinated to ~~secure and offer vaccinations to~~wear masks at all ~~eligible employees.~~times while on bank premises.

Regarding our banking operations, commercial activity within our market area, while improving, remains volatile and has not returned pre-pandemic levels. Economic restrictions adopted in 2020 caused many borrowers to request payment deferrals and other payment accomodations. As of the end of the second quarter of 2021, nearly all have resumed making contractual principal and interest payments. While positive developments have occurred, management is keenly aware that uncertainty regarding the pandemic still exists. The number of positive cases has risen in recent weeks, as the Delta variant of the virus has begun rapidly spreading, specifically in areas with low vaccination rates. The reinstitution of restrictions by federal, state and local governmentsm, if adopted, could negatively impact economic recovery, and result in financial distress for FNCB’s business and consumer customers, may continue to experience varying degrees of financial distress. Uncertainty regarding the pandemic still exists. Should the number of cases rise, or new COVID-19 variant infections increase, additional economic restrictionswhich could ~~be mandated again. Commercial activity has improved, but has not returned pre-pandemic levels, which may~~ impede loan growth and ~~could~~ result in ~~a deterioration in~~ asset ~~quality.~~quality deterioration. Additionally, FNCB's commercial customer base includes businesses in industries such as hotel/lodging, restaurants, hospitality, and retail and commercial real estate, all of which ~~have~~had been significantly and adversely impacted in 2020 by economic restriction related to the COVID-19 pandemic. Management continues to closely monitor customers within these industries as the economic recovery unfolds.
On December 27, 2020, another COVID-19 relief bill was signed into law that extended and modified several provisions of the PPP. This included an additional allocation of $284 billion in funding. The SBA reactivated the PPP on January 11, 2021, and on January 19, 2021, FNCB began originating additional PPP loans through the PPP. The SBA will continue to accept new applications through May 31, 2021. In the three months ended March 31, 2021, FNCB had generated and received SBA approval and funding for 540 PPP loans totaling $59.0 million and received $2.8 million in related deferred loan origination fees associated with this funding. During the three months ended March 31, 2021, FNCB received forgiveness for PPP loans totaling $30.2 million originated in 2020 under the first round of funding, with $1.3 million in PPP loan origination fees, net of loan origination costs, recognized into interest income upon forgiveness. PPP loans outstanding at March 31, 2021 were $107.4 million. FNCB expects to apply and receive forgiveness for the majority of these loans by the end of 2021.

Management expects the COVID-19 pandemic, as well as certain provisions of legislative and regulatory relief efforts, to continue to impact FNCB's operations. The full impact is still unknown, continues to evolve and will be contingent upon the ~~speed~~spread of variant strains, vaccination rates and ~~extent of~~continued economic recovery. At this time, management cannot determine or estimate the full magnitude of the impact and cannot provide any assurances as to ~~how~~ the ~~crisis may ultimately affect~~effect on FNCB's results of operations or financial position. The FNCB team will continue to work diligently to address any issues related to the COVID-19 pandemic in a safe and sound manner as they arise. Management believes that FNCB's balance sheet and capital position are strong and will allow FNCB to withstand ~~the~~any further challenges that may be presented.

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Executive Summary

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

FNCB recorded consolidated net income of $~~5.8~~5.2 million, or ~~$0.29~~$0.26 per basic and diluted common share, for the three months ended ~~March 31,~~June 30, 2021, an increase of ~~$3.7~~$1.2 million, or ~~182.7%~~30.0%, compared to ~~$2.1~~$4.0 million, or ~~$0.10~~$0.20 per basic and diluted common share, for the three months ended ~~March 31,~~June 30, 2020. The increase in ~~first~~second quarter ~~2021~~ earnings ~~over the same quarter of 2020~~ was primarily due to a ~~$2.2~~$2.4 million, or ~~24.2%~~25.6%, increase in net interest income, which reflected lower funding costs, higher volumes of earning assets and the recognition of $1.3 million in net loan origination fees on forgiven PPP loans, partially offset by reductions in earning asset yields. Also favorably impacting net income in the first quarter of 2021, were an increase in non-interest income, coupled with a $0.7 million, or 81.3%, reduction in the provision for loan and lease losses. Partially offsetting these ~~positive factors~~favorable variances comparing the ~~year-to-date periods~~three months ended June 30, 2021 and 2020 was a $0.8 million, or 31.7%, reduction in non-interest income and a $0.8 million, or 12.5%, increase in non-interest expense. Net income for the six months ended June 30, 2021 totaled $11.1 million, or $0.55 per basic and diluted share, an increase of $5.0 million, or 81.8%, compared to $6.1 million, or $0.30 per basic and diluted shares, for the same six months of 2020. Similar to the quarterly period, the increase in ~~income tax expense, due to higher levels of pre-tax~~year-to-date net income was caused primarily by a $4.7 million, or 24.9%, increase in ~~2021.~~ net interest income and a $1.6 million, or 82.8%, reduction in the provision for loan and lease losses, partially offset by an $0.8 million, or 5.6%, increase in non-interest expense. However, comparing the six months ended June 30, 2021 and 2020, non-interest income increased $0.3 million, or 6.9%.

For the three and six months ended ~~March 31,~~June 30, 2021, ~~and 2020,~~ the annualized return on average assets was 1.38% and 1.49%, respectively, and 1.21% and 0.96%, respectively, for the same period of 2020. The annualized return on average equity was ~~1.61%~~13.37% and ~~15.27%~~, ~~respectively, and 0.69% and 6.06%~~14.31%, respectively for the ~~same period~~three and six months ended June 30, 2021, compared to 11.62% and 8.87%, for the comparable periods of 2020. FNCB declared and paid dividends to holders of common stock of $0.060 per share for the ~~three~~second quarter of 2021 and $0.120 per share for the six months ended ~~March 31,~~June 30, 2021, a 9.1% increase compared to $0.055 and $0.110 per share for the same ~~quarter~~periods of 2020.

Total assets increased ~~$34.4~~$59.1 million, or ~~2.3%~~4.0%, to ~~$1.500~~$1.525 billion at ~~March 31,~~June 30, 2021 from $1.466 billion at December 31, 2020. The change in total assets primarily reflected increases in net loans and available-for-sale debt securities, which were partially offset by a decrease in cash and cash equivalents. Net loans increased ~~$30.7~~$75.1 million, or ~~3.5%~~8.4%, to ~~$919.9~~$964.3 million at ~~March 31,~~June 30, 2021 from $889.2 million at December 31, 2020.  Also contributing to the balance sheet expansion was a $~~57.4~~82.8 million, or ~~16.4%~~23.6%, increase in available-for-sale debt securities to ~~$407.4~~$432.8 million at ~~March 31,~~June 30, 2021 from $350.0 million at December 31, 2020. Cash and cash equivalents decreased ~~$57.3~~$99.9 million, or ~~36.7%~~64.1%, to $~~98.5~~55.9 million at ~~March 31,~~June 30, 2021 from $155.8 million at December 31, 2020. Total deposits increased ~~$35.4~~$50.7 million, or ~~2.7%~~3.9%, to ~~$1.323~~$1.338 billion at ~~March 31,~~June 30, 2021 from $1.287 billion at December 31, 2020. Total borrowed funds, comprised entirely of FNCB's junior subordinated debentures, remained constant at $10.3 million at ~~March 31,~~June 30, 2021 and December 31, 2020.

On January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program under which up to 975,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier than February 3, 2021 and expiring December 31, 2021, pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. 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 is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue at any time that management determines additional repurchases are no longer warranted. As of June 30, 2021, FNCB repurchased 193,530 shares for an approximate aggregate cost of $1.4 million.
Total shareholders’ equity ~~decreased~~increased $~~930 thousand,~~4.7 million, or ~~0.6%~~3.1%, to ~~$154.9~~$160.6 million at ~~March 31,~~June 30, 2021 from $155.9 million at December 31, 2020. ~~Contributing to the decrease~~The increase in capital was primarily due to net income for the six months ended June 30, 2021 of $11.1 million, partially offset by $2.4 million in dividends declared and paid for the six months ended June 30, 2021, a ~~$5.6~~$2.7 million decrease in accumulated other comprehensive income related primarily to the depreciation in the fair value of FNCB's available-for-sale debt securities, net of deferred ~~taxes. Also contributing to the decrease in capital were dividends declared~~taxes, and ~~paid of $1.2~~$1.4 million for the ~~three months ended March 31, 2021. These reductions to capital were partially offset by net income for the three months ended March 31, 2021~~repurchase of ~~$5.8 million.~~common shares. FNCB Bank's total risk-based capital and Tier 1 leverage ratios ~~improved to 16.26%~~were 15.79% and ~~9.88%~~9.90% at ~~March 31,~~June 30, 2021, respectively, compared to 15.79% and 9.57% at December 31, 2020, respectively.

For the remainder of 2021, management is focused on assisting customers with PPP loans through the forgiveness process, enhancing FNCB’s digital banking platform and evaluating opportunities to leverage capital to improve FNCB’s future profitability.
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Summary of Performance

Net Interest Income

Net interest income, defined 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, is the primary source of earnings for commercial banks. As such, it is the primary determinant of profitability for FNCB. Net interest income is impacted by variations in the volume, rate and composition of ~~earnings~~earning assets and interest-bearing liabilities, changes in general market rates and the level of non-performing assets. Interest income is presented on a fully tax-equivalent basis using the corporate statutory tax rate of 21.0% in 2021 and 2020.

In response to the significant disruption and uncertainty in the economic environment brought on by COVID-19, the Federal Open Market Committee ("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, 2020 to 0.00%-0.25% at March 31, 2020 and has remained at that level through ~~March 31,~~June 30, 2021. The FOMC actions, along with decreases in general market interest rates, ~~has~~have resulted in decreases in ~~both the tax-equivalent yield~~yields earned on earning-assets, ~~and~~as well as the ~~rate~~rates paid on interest-bearing liabilities comparing the three and six months ended ~~March 31,~~June 30, 2021 and 2020. Additionally, net interest income, earning-asset yields and the net interest margin were impacted by the origination, funding and forgiveness of PPP loans.

Net interest income on a tax-equivalent basis increased ~~$2.3~~$2.5 million, or ~~24.9%~~25.3%, to ~~$11.6~~$12.3 million for the three months ended ~~March 31,~~June 30, 2021 from ~~$9.3~~$9.8 million for the comparable period of 2020. The improvement in tax-equivalent net interest income ~~for the first quarter of 2021~~ primarily reflected an increase in tax-equivalent interest income of ~~$1.2~~$1.6 million or ~~10.6%~~14.3%, to ~~$12.5~~$13.0 million for the second quarter of 2021 from ~~$11.3~~$11.4 million for the same quarter of 2020, coupled with a decrease in interest expense of ~~$1.1~~$0.8 million, or ~~57.0%~~52.4%, to ~~$846 thousand~~$0.8 million from ~~$2.0~~$1.6 million comparing the ~~first~~second quarters of 2021 and 2020. 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 2440 basis points to ~~3.59%~~3.58% for the ~~first~~second quarter of 2021 from ~~3.35%~~3.18% for the same quarter of 2020, and 30 basis points to 3.53% for the six months ended June 30, 2021, from 3.23% for the same six-month period of 2020. The margin improvement was primarily impacted by activity related to PPP loans, coupled with ~~a decrease of 55 basis points~~decreases in ~~the cost of funds.~~funding costs. Additionally, 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, improved 3449 basis points to ~~3.51%~~3.50% for the three months ended ~~March 31,~~June 30, 2021 from ~~3.17%~~3.01% for the same three months of 2020 . For the year-to-date period ended June 30, 2021, the rate spread improved 41 basis points to 3.45% from 3.04% for the same period of 2020.

~~Comparing~~The $1.6 million, or 14.3%, increase in tax-equivalent interest income comparing the second quarters of 2021 and 2020 largely reflected higher volumes of earning assets, coupled with a net increase in the tax-equivalent yield on earning assets. Total average earning assets increased $138.1 million, or 11.2%, to $1.371 billion for the three months ended ~~March 31,~~June 30, 2021 from $1.233 billion for the same three months of 2020, which resulted in a corresponding increase in tax-equivalent interest income of $1.0 million. Specifically, total securities averaged $409.2 million for the second quarter of 2021, an increase of $105.0 million, or 34.5%, from $304.2 million for the second quarter of 2020, which was largely due to the redeployment of excess cash into the investment portfolio. Additionally, average total loans increased ~~$1.2~~$32.4 million, or 3.5%, to ~~$12.5~~$954.4 million ~~compared to $11.3~~for the second quarter of 2021 from $922.0 million for the same quarter of 2020, which largely reflected PPP loans originated under the second round of funding for this program. The average balance of PPP loans increased $15.9 million, or 17.7%, to $105.7 million for the second quarter of 2021 from $89.8 million for the second quarter of 2020. Increases in ~~2020. This included an increase~~the average balances of ~~$945 thousand~~securities and loans resulted in corresponding increases to tax-equivalent interest income ~~due~~of $0.7 million and $0.3 million, respectively, comparing the three months ended June 30, 2021 and 2020. In addition to ~~a $87.0 million, or 10.4%, increase in average total loan balances. Partially offsetting~~ the volume increase there was a ~~14-basis~~10-basis point ~~reduction~~increase in the tax-equivalent yield on ~~average loan balances that reduced tax-equivalent interest income by $315 thousand. Included~~earning assets, which resulted in a corresponding increase in tax-equivalent interest income of $0.6 million. The tax-equivalent yield on ~~loans~~the loan portfolio increased 35 basis points to 4.33% for the three months ended ~~March 31,~~June 30, 2021 ~~was $1.5 million earned on PPP loans, including~~compared to 3.98% for the same three months of 2020. Loan yields were favorably impacted by the recognition of ~~$1.2~~$1.1 million in net deferred loan origination ~~fees.~~fees on forgiven PPP ~~loans, net of deferred origination fees, averaged $94.8 million for~~loans. Partially offsetting the first quarter of 2021. There was no activity related to PPP loans in the first quarter of 2020. In addition, total average securities increased $90.6 million, or 33.4%, to $362.0 million from $271.4 million in the same quarter of 2020, contributing $891 thousand to tax-equivalent interest income, which was slightly offset by the $307 thousand decline in tax-equivalent interest incomepositive impact due to the ~~10 basis-point~~increase in loan yields, was a 30-basis point reduction in the tax-equivalent yield on the securities ~~portfolio.~~portfolio to 2.63% for the second quarter of 2021 from 2.93% for the same quarter of 2020, which resulted in a corresponding decrease to tax-equivalent interest income of $0.3 million.

The ~~57.0%~~$0.8 millon, or 52.4%, decrease in interest expense was primarily due to a ~~55-basis~~39-basis point reduction in the cost of funds to ~~0.34%~~0.30% for the three months ended ~~March 31,~~June 30, 2021 from ~~0.89%~~0.69% for the same three months of 2020. Specifically, the average rate paid for interest-bearing deposits decreased 4937 basis points to ~~0.32%~~0.28% for the ~~first~~second quarter of 2021 from ~~0.81%~~0.65% for the same period of 2020, resulting in a corresponding decrease to interest expense of ~~$1.2~~$0.8 million. The average rates paid for interest-bearing demand and time deposits, which reflected the reduction in market interest rates and repricing of higher-costing time deposit upon maturity, decreased 4834 basis points and 5853 basis points, respectively, comparing the three months ended ~~March 31,~~June 30, 2021 and 2020. The decrease in interest expense due to changes in deposit rates was coupled with a ~~$51.5~~$71.5 million, or ~~83.3%~~87.4% decrease in average borrowed funds comparing the three months ended ~~March 31,~~June 30, 2021 to the same period of 2020, which resulted in a ~~$241 thousand~~corresponding decrease in interest ~~expense.~~expense $0.3 million. FNCB experienced strong deposit growth due to additional fiscal stimulus passed in the first quarter of 2021. Changing customer deposit preferences due to the reduction in economic activity and uncertainty related to the COVID-19 pandemic also contributed to the deposit growth, as well as factoring into deposit migration from time deposits into non-maturity deposits. Specifically, average interest-bearing deposits increased ~~$177.9~~$169.1 million, or ~~21.7%~~19.9%, to ~~$999.1 million~~$1.020 billion from ~~$821.2~~$850.5 million comparing the ~~first~~second quarters of 2021 and 2020, respectively. Average interest-bearing demand deposits increased ~~$167.0~~$149.3 million, or ~~31.6%~~26.5%, to ~~$695.8~~$712.8 million for the ~~first~~second quarter of 2021 compared to ~~$528.8~~$563.5 million for the same quarter of 2020, while average savings deposits increased ~~$20.4~~$23.8 million, or ~~21.7%~~24.0%, to ~~$114.3~~$123.3 million from ~~$94.0~~$99.4 million comparing the ~~first~~second quarters of 2021 and 2020, respectively. Conversely, average time deposits decreased ~~$9.5~~$4.0 million to ~~$188.9~~$183.6 million for the three months ended ~~March 31,~~June 30, 2021 from ~~$198.4~~$187.6 million for the same three months of 2020. The strong growth in deposit volumes resulted in a combined net increase to interest expense of ~~$330 thousand. FNCB used the excess liquidity from deposit growth to reduce its reliance on and repay higher-costing borrowed funds. As a result, average~~$0.1 million. Average borrowed funds decreased ~~$51.5~~$71.5 million, or ~~83.3%~~87.4%, to $10.3 million from ~~$61.8~~$81.8 million comparing the ~~first~~second quarters of 2021 and 2020, which resulted in a decrease to interest expense of ~~$241 thousand.~~ $0.3 million, as previously mentioned.
On a year-to-date basis, tax-equivalent net interest income increased $4.8 million, or 25.1%, to $23.9 million for the six months ended June 30, 2021 from $19.1 million for the comparable period of 2020. The improvement in tax-equivalent net interest income was due to a $2.8 million, or 12.5%, increase in tax-equivalent interest income, coupled with a $2.0 million, or 54.9%, decrease in interest expense. The increase in tax-equivalent interest income for the year-to-date period resulted primarily from the $179.8 million, or 15.3%, increase in average earning asset balances. Average total security balances increased $97.9 million, or 34.0%, to $385.7 million for the six months ended June 30, 2021 from $287.8 million for the same period of 2020, resulting in an increase of $1.4 million in interest income. In addition, average loan balances increased $59.8 million, or 6.8%, to $937.5 million for the six months ended June 30, 2021, compared to $877.7 million for the same six months of 2020, resulting in an increase of $1.3 million in interest income. Changes in the tax-equivalent yields on earnings assets had only a modest impact on year-to-date tax-equivalent interest income, as an 11-basis point increase in the tax-equivalent yield on the loan portfolio was almost entirely offset by a 20-basis point reduction in the tax-equivalent yield on the securities portfolio.

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The $2.0 million, or 54.9%, decrease in interest expense resulted primarily from a decrease in funding costs, and a reduction in average borrowed funds, partially offset by an increase in average interest-bearing deposits. FNCB's total cost of funds decreased 47 basis points to 0.32% for the six months ended June 30, 2021 from 0.79% for the same six months of 2020, resulting in a corresponding decrease to interest expense of $1.8 million. The cost of interest-bearing deposits decreased 43 basis points to 0.30% from 0.73%, respectively, comparing the six months ended June 30, 2021 and 2020. Specifically, comparing the year-to-date periods of 2021 and 2020, the rates paid on time deposits, interest-bearing demand deposits and savings deposits decreased 56 basis points, 41 basis points and 4 basis points, respectively. Regarding volumes of interest-bearing liabilities, borrowed funds averaged $10.3 million for the six months ended June 30, 2021, a decrease of $61.5 million, or 85.7%, from $71.8 million for the same period of 2020, which resulted in a corresponding decrease to interest expense of $0.5 million. Partially offsetting this decrease was a $173.5 million, or 20.8%, increase in average interest-bearing deposits to $1.009 billion for the first half of 2021 compared to $835.9 million for the same period of 2021, which resulted in additional interest expense of $0.3 million.

Net interest income depends upon the relative amount 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 of financial condition and consolidated statements of income for the ~~three-month period~~three and  six-month periods ended ~~March 31,~~June 30, 2021 and 2020 and reflects 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. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.

Three Months Ended

Three Months Ended

March 31, 2021

March 31, 2020

June 30, 2021

June 30, 2020

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)
$ 873,544 $ 9,401 4.30 % $ 780,855 $ 8,693 4.45 % $ 909,833 $ 9,897 4.35 % $ 875,119 $ 8,661 3.96 %
Loans-tax free (4)
46,897 487 4.15 % 52,615 565 4.30 % 44,583 437 3.92 % 46,836 505 4.31 %
Total loans (1)(2)
920,441 9,888 4.30 % 833,470 9,258 4.44 % 954,416 10,334 4.33 % 921,955 9,166 3.98 %
Securities-taxable
286,128 1,968 2.75 % 236,697 1,927 2.92 % 326,848 2,039 2.50 % 247,939 1,739 2.81 %
Securities-tax free
75,876 615 3.24 % 7,698 72 3.74 % 82,304 653 3.17 % 56,220 491 3.49 %
Total securities (1)(5)
362,004 2,583 2.85 % 271,395 1,999 2.95 % 409,152 2,692 2.63 % 304,159 2,230 2.93 %
Interest-bearing deposits in other banks and federal funds sold (8)
13,490 3 0.09 % 7,230 21 1.16 % 7,042 1 0.06 % 6,439 3 0.19 %
Total earning assets (8)
1,295,935 12,474 3.85 % 1,112,095 11,278 4.06 % 1,370,610 13,027 3.80 % 1,232,553 11,399 3.70 %
Non-earning assets (8)
187,490 100,520 158,239 118,722
Allowance for loan and lease losses
(12,189 ) (8,967 ) (12,378 ) (10,114 )
Total assets
$ 1,471,236 $ 1,203,648 $ 1,516,471 $ 1,341,161

Liabilities and Shareholders' Equity

Interest-bearing liabilities

Interest-bearing demand deposits
$ 695,794 380 0.22 % $ 528,802 930 0.70 % $ 712,760 327 0.18 % $ 563,491 728 0.52 %
Savings deposits
114,349 20 0.07 % 93,989 28 0.12 % 123,261 22 0.07 % 99,434 23 0.09 %
Time deposits
188,942 398 0.84 % 198,425 702 1.42 % 183,591 369 0.80 % 187,600 625 1.33 %
Total interest-bearing deposits
999,085 798 0.32 % 821,216 1,660 0.81 % 1,019,612 718 0.28 % 850,525 1,376 0.65 %
Borrowed funds and other interest-bearing liabilities
10,310 48 1.86 % 61,843 307 1.99 % 10,310 48 1.86 % 81,813 234 1.14 %
Total interest-bearing liabilities
1,009,395 846 0.34 % 883,059 1,967 0.89 % 1,029,922 766 0.30 % 932,338 1,610 0.69 %
Demand deposits
294,525 172,132 317,670 258,609
Other liabilities
12,413 11,636 11,998 11,065
Shareholders' equity
154,903 136,821 156,881 139,149
Total liabilities and shareholder's equity
$ 1,471,236 $ 1,203,648 $ 1,516,471 $ 1,341,161

Net interest income/interest rate spread (6) (8)
11,628 3.51 % 9,311 3.17 % 12,261 3.50 % 9,789 3.01 %
Tax equivalent adjustment
(231 ) (134 ) (229 ) (209 )
Net interest income as reported
$ 11,397 $ 9,177 $ 12,032 $ 9,580

Net interest margin (7) (8)
3.59 % 3.35 % 3.58 % 3.18 %

(1)
Interest income is presented on a tax equivalent basis using a 21% rate.

(2)
Loans are stated net of unearned income.

(3)
Non-accrual loans are included in loans within earning assets.

(4)
Loan fees included in interest income are not significant.

(5)
The yields for securities that are classified as available for sale 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 liabilities and is presented on a tax equivalent basis.

(7)
Net interest income as a percentage of total average interest earning assets.
(8) Reflects revisions to average balances for the three months ended ~~March 31,~~June 30, 2020 to reclassify certain average deposits in other banks from non-interest deposits in other banks to non-earning assets in the amount of ~~$1,166.~~$21,419.

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Six Months Ended

June 30, 2021

June 30, 2020

Average

Yield/

Average

Yield/

(dollars in thousands)

Balance

Interest

Cost

Balance

Interest

Cost

Assets

Earning assets (2)(3)

Loans-taxable (4)
$ 891,789 $ 19,298 4.33 % $ 827,987 $ 17,354 4.19 %
Loans-tax free (4)
45,733 924 4.04 % 49,726 1,070 4.30 %
Total loans (1)(2)
937,522 20,222 4.31 % 877,713 18,424 4.20 %
Securities-taxable
306,601 4,007 2.61 % 255,817 3,666 2.87 %
Securities-tax free
79,108 1,268 3.21 % 31,959 563 3.52 %
Total securities (1)(5)
385,709 5,275 2.74 % 287,776 4,229 2.94 %
Interest-bearing deposits in other banks and federal funds sold (8)
28,904 4 0.03 % 6,835 24 0.70 %
Total earning assets (8)
1,352,135 25,501 3.77 % 1,172,324 22,677 3.83 %
Non-earning assets (8)
154,128 109,620
Allowance for loan and lease losses
(12,284 ) (9,540 )
Total assets
$ 1,493,979 $ 1,272,404

Liabilities and Shareholders' Equity

Interest-bearing liabilities

Interest-bearing demand deposits
$ 704,324 707 0.20 % $ 546,146 1,658 0.61 %
Savings deposits
118,830 42 0.07 % 96,712 51 0.11 %
Time deposits
186,252 767 0.82 % 193,013 1,327 1.38 %
Total interest-bearing deposits
1,009,406 1,516 0.30 % 835,871 3,036 0.73 %
Borrowed funds and other interest-bearing liabilities
10,310 96 1.86 % 71,828 541 1.51 %
Total interest-bearing liabilities
1,019,716 1,612 0.32 % 907,699 3,577 0.79 %
Demand deposits
306,161 215,371
Other liabilities
12,205 11,350
Shareholders' equity
155,897 137,984
Total liabilities and shareholder's equity
$ 1,493,979 $ 1,272,404

Net interest income/interest rate spread (6) (8)
23,889 3.45 % 19,100 3.04 %
Tax equivalent adjustment
(460 ) (343 )
Net interest income as reported
$ 23,429 $ 18,757

Net interest margin (7) (8)
3.53 % 3.23 %
(1)
Interest income is presented on a tax equivalent basis using a 21% rate.
(2)
Loans are stated net of unearned income.
(3)
Non-accrual loans are included in loans within earning assets.
(4)
Loan fees included in interest income are not significant.
(5)
The yields for securities that are classified as available for sale 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 liabilities and is presented on a tax equivalent basis.
(7)
Net interest income as a percentage of total average interest earning assets.
(8) Reflects revisions to average balances for the three months ended June 30, 2020 to reclassify certain average deposits in other banks from non-interest deposits in other banks to non-earning assets in the amount of $11,292.
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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 corporate federal income tax rate of 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 March 31,

Three Months Ended June 30,

Six Months Ended June 30,

2021 vs. 2020

2021 vs. 2020

2021 vs. 2020

Increase (Decrease)

Increase (Decrease)

Increase (Decrease)

Due to

Due to

Total

Due to

Due to

Total

Due to

Due to

Total

(in thousands)

Volume

Rate

Change

Volume

Rate

Change

Volume

Rate

Change

Interest income:

Loans - taxable
$ 1,005 $ (297 ) $ 708 $ 353 $ 883 $ 1,236 $ 1,368 $ 576 $ 1,944
Loans - tax free
(60 ) (18 ) (78 ) (24 ) (45 ) (69 ) (83 ) (63 ) (146 )
Total loans
945 (315 ) 630 329 838 1,167 1,285 513 1,798
Securities - taxable
170 (129 ) 41 508 (208 ) 300 683 (342 ) 341
Securities - tax free
721 (178 ) 543 210 (48 ) 162 760 (55 ) 705
Total securities
891 (307 ) 584 718 (256 ) 462 1,443 (397 ) 1,046
Interest-bearing deposits in other banks and federal funds sold
10 (28 ) (18 ) - (2 ) (2 ) 20 (40 ) (20 )
Total interest income
1,846 (650 ) 1,196 1,047 580 1,627 2,748 76 2,824

Interest expense:

Interest-bearing demand deposits
357 (907 ) (550 ) 157 (558 ) (401 ) 383 (1,334 ) (951 )
Savings deposits
5 (13 ) (8 ) 5 (6 ) (1 ) 10 (19 ) (9 )
Time deposits
(32 ) (272 ) (304 ) (13 ) (243 ) (256 ) (45 ) (515 ) (560 )
Total interest-bearing deposits
330 (1,192 ) (862 ) 149 (807 ) (658 ) 348 (1,868 ) (1,520 )
Borrowed funds and other interest-bearing liabilities
(241 ) (18 ) (259 ) (279 ) 93 (186 ) (549 ) 104 (445 )
Total interest expense
89 (1,210 ) (1,121 ) (130 ) (714 ) (844 ) (201 ) (1,764 ) (1,965 )
Net interest income
$ 1,757 $ 560 $ 2,317 $ 1,177 $ 1,294 $ 2,471 $ 2,949 $ 1,840 $ 4,789
Provision for Loan and Lease Losses

The provision for loan and lease losses is an expense charged against net interest income to provide for probable losses attributable to uncollectible loans and is based on management’s analysis of the adequacy of the ALLL. A release of reserves, resulting in a credit for loan and lease losses, reflects the reversal of amounts previously charged to the ALLL. Management closely monitors the loan portfolio and the adequacy of the ALLL by considering the underlying financial performance of the borrower, collateral values and associated credit risks. Future material adjustments may be necessary to the provision for loan and lease losses and the ALLL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ALLL. In 2020, management tried to address any potential adverse impact the COVID-19 pandemic had on economic conditions in its application of FNCB's methodology on the ~~allowance for loan and lease losses~~ALLL by adjusting the qualitative factor associated with changes in national, local and business economic conditions and developments ~~which~~and increasing the unallocated portion of the ALLL to a maximum of 10.0% of the total allowance. Both actions resulted in higher credit provisioning in 2020. ~~Management made no adjustment~~During the first half of 2021, FNCB's asset quality metrics have remained favorable and FNCB is not aware of any losses related to COVID-19 as of the date of this Report. While the economy has begun to recover, COVID-19 continues to be an issue as the number of new cases related to the Delta variant have started to increase. Due to the continued uncertainty surrounding the virus, management has maintained the qualitative factor associated with changes in national, local and business economic conditions and ~~developments, as~~development at the ~~economy appears to have begun to recover from the impacts of the COVID-19 pandemic~~heightened level established in ~~2021.~~2020.

FNCB recorded a provision for loan and lease losses of ~~$186~~$155 thousand for the three-month period ended ~~March 31,~~June 30, 2021 compared to ~~$1.2 million~~$831 thousand for the three months ended ~~March 31,~~June 30, 2020. The ~~reduction in the~~ provision for loan and lease losses ~~was attributable to~~totaled $341 thousand for the six months ended June 30, 2021, a ~~reduction in loan volumes, excluding PPP loans.~~decrease of $1.6 million, from $2.0 million for the same six months of 2020, reflecting the higher credit provisioning during 2020.

Non-interest Income

~~Non-interest~~For the three months ended June 30, 2021, non-interest income ~~increased $1.1~~decreased $0.8 million, or ~~63.8%~~31.7%, to ~~$2.8~~$1.7 million from $2.5 million for the three months ended ~~March 31, 2021 from $1.7 million for the same three months of~~June 30, 2020. The ~~increase resulted primarily from a gain of $422 thousand from a bank-owned life insurance death benefit claim that~~decrease was ~~recognized~~largely due to reductions in ~~the first quarter of 2021, coupled with increases in net gains on equity securities, and~~ net gains on the sale of ~~mortgage loans held for sale. Net~~available-for-sale debt securities of $922 thousand and loan referral fees of $198 thousand, partially offset by an increase in deposit service charges of $248 thousand. There were no net gains ~~on equity securities increased $350 thousand to $364 thousand for the first quarter of 2021 compared to $14 thousand for the same quarter of 2020. Net gains~~realized on the sale of ~~mortgage loans were $224 thousand for~~available-for-sale debt securities during the three months ended ~~March 31, 2021, a $128 thousand, or 133.3%, increase compared to $96 thousand in~~June 30, 2021. Comparatively, net gains realized on the sale of available-for-sale debt securities were $922 thousand for the same three-month period of 2020. ~~Additionally FNCB experienced increases in net gains on available-for-sale debt securities,~~Loan referral fees include fees received from counterparties related to various commercial loan ~~related~~interest rate swap transactions and fees ~~and deposit service charges. Net gains on the sale of available-for-sale securities totaled $213 thousand~~received for the ~~first quarter~~referral of FHA residential mortgage loans to a third-party broker. The reduction in loan referral fees reflected a decrease in the number and volume of such transactions in 2021 ~~an increase of $64~~as compared to 2020. These reductions were partially offset by a $248 thousand, or 43.0%, compared to $149 thousand for the same quarter of 2020. Additionally, loan-related fees increased $77 thousand, or 137.5%, to $133 thousand for the three months ended March 31, 2021, compared to $56 thousand for the same period of 2020, while an increase in debit card usage contributed to the $49 thousand, or 5.9%35.0%, increase in deposit service charges to ~~$874~~$956 thousand ~~from $825 thousand comparing~~for the three months ended ~~March 31,~~June 30, 2021 ~~and 2020, respectively.~~compared to $708 thousand for the three months ended June 30, 2020.

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For the six months ended June 30, 2021, non-interest income increased $288 thousand, or 6.8%, to $4.5 million from $4.2 million for the same period of 2020. The increase resulted primarily from a settlement in the amount of $426 thousand from bank-owned life insurance death benefit claim that was recognized in 2021, coupled with increases in net gains on equity securities, deposit service charges and loan-related fees. Net gains on equity securities were $400 thousand for the six months ended June 30, 2021, compared to $18 thousand for the same period of 2020, an increase of $382 thousand. Deposit service charges increased $297 thousand, or 19.4%, to $1.8 million from $1.5 million for the same six-month period of 2020, resulting from an increase in debit card usage. Additionally, loan-related fees increased $156 thousand, or 192.6%, to $237 thousand for the six months ended June 30, 2021, compared to $81 thousand for the six months ended June 30, 2020. The increase in loan related fees was due primarily to the recognition of servicing fees on loans originated under the Main Street Lending Program. These increases were slightly offset by a $858 thousand, or 80.1%, decrease in net gains on available-for-sale debt securities to $213 thousand for the six months ended June 30, 2021 from $1.1 million for the same period of 2020.
Non-interest Expense

Non-interest expense ~~was relatively constant at $7.2 million, decreasing by $34~~increased $802 thousand, or 0.5%, comparing the three months ended March 31, 2021 and 2020. The decrease primarily reflected reductions in salaries and benefits, advertising expenses and other operating expenses. Salaries and benefits decreased $193 thousand, or 4.9%12.5% to ~~$3.7~~$7.2 million for the three months ended ~~March 31,~~June 30, 2021 from ~~$3.9~~$6.4 million for the three months ended June 30, 2020. The increase primarily reflected increases in salaries and benefits, data processing, and advertising expenses. Salaries and benefits increased $540 thousand, or 15.4%, to $4.0 million for the three months ended June 30, 2021, from $3.5 million for the same period in ~~2020, due primarily~~2020. Data processing and advertising expenses increased $176 thousand and $101 thousand, respectively, to $885 thousand and $214 thousand, respectively, for the second quarter of 2021 when compared to the ~~deferral~~same quarter of 2020.
For the six months ended June 30, 2021, non-interest expense increased $768 thousand, or 5.6%, to $14.4 million compared to $13.6 million for the same six month period of 2020, primarily due to the increase salaries and employee benefits, data processing expenses and regulatory assessments. Salaries and employee benefits increased $347 thousand, or 4.7%, to $7.8 million at June 30, 2021, compared to $7.4 million for the six months ended June 30, 2020. Data processing expenses increased $270 thousand, or 18.8%, to $1.7 million for the first half of 2021, compared to $1.4 million for the same period of 2020. Regulatory assessments increased $167 thousand, or 125.6%, to $300 thousand at June 30, 2021, from $133 thousand for the six months ended June 30, 2020.
Marketing initiatives were very limited during the second quarter of 2020 as FNCB was operating under its pandemic preparedness plan. With the reopening of the economy and FNCB branches fully operational, marketing initiatives have since resumed, which resulted in the increase in advertising costs for the second quarter of 2021. In comparing both the second quarter and year-to-date periods of 2021 and 2020, the increase in salaries and employee benefits was largely due to a decrease in the amount of payroll-related loan origination costs ~~associated with PPP loans. Advertising expenses decreased $90 thousand, or 43.5%, to $117 thousand for~~that are deferred and amortized over the first quarter of 2021 from $207 thousand for the same quarter of 2020, as FNCB reduced its advertising during the pandemic. Other operating expenses decreased $97 thousand, or 11.1%, to $775 thousand from $872 thousand comparing the three months ended March 31, 2021 and 2020. This decrease reflected reductions in OREO-related expenses, coupled with reductions in office expense, auto expense and travel and entertainment expense due to travel restrictions and a large percentage of staff working remotely. These expense reductions were offset by increases in regulatory assessments of $129 thousand, or 218.6%, data processing of $94 thousand, or 13.0%, professional fees of $71 thousand, or 37.8%, and occupancy expense of $55 thousand, or 9.9%, comparing the three months ended March 31, 2021 and 2020. Regulatory assessments for the first quarter of 2020 were reduced by the remainderlife of the ~~FDIC's small bank assessment credit. There were no such assessment credits in 2021.~~loan. The increase in data processing ~~expense~~costs reflected added costs associated with ~~employees working remotely, coupled with additions~~a remote work environment, enhancements made to FNCB's digital banking services, ~~while the~~including cybersecurity protection, and higher software costs. The year-over-year increase in ~~professional fees was primarily due to additional costs associated with FNCB's annual audit. The increase~~regulatory assessments reflected the utilization of the remaining FDIC small bank assessment credits in ~~FNCB's occupancy expense was largely due to higher snow removal costs.~~ 2020.

Provision for Income Taxes

FNCB recorded income tax expense of $~~1.0~~2.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2021, an increase of ~~$529~~$855 thousand, or ~~117.0%~~68.0%, compared to income tax expense of ~~$0.5~~$1.3 million for the same period of 2020. The increase in income tax expense primarily reflected an increase in pre-tax net income of ~~$4.3~~$5.8 million, or ~~170.9%~~79.5%, when comparing the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020. Despite the increase in income tax expense, FNCB's effective tax rate decreased to ~~14.40% for the first quarter of~~16.03% at June 30, 2021 compared to ~~17.97%~~17.13% for the ~~same quarter~~period of 2020, which was primarily caused by higher levels of tax-exempt ~~income.~~income and the bank-owned life insurance settlement, which is non-taxable.

FINANCIAL CONDITION

Assets

Total assets increased ~~$34.4~~$59.1 million, or ~~2.3%~~4.0%, to ~~$1.500~~$1.525 billion at ~~March 31,~~June 30, 2021 from $1.466 billion at December 31, 2020. The change in total assets primarily reflected increases in net loans and available-for-sale debt securities, which were partially offset by a decrease in cash and cash equivalents. Net loans increased ~~$30.7~~$75.1 million, or ~~3.5%~~8.4%, to ~~$919.9~~$964.3 million at ~~March 31,~~June 30, 2021 from $889.2 million at December 31, 2020, primarily due to the origination and funding of a second round of PPP loans, partially offset by first-round PPP loan forgiveness. Available-for-sale debt securities increased ~~$57.4~~$82.8 million, or ~~16.4%~~23.6%, to ~~$407.4~~$432.8 million at ~~March 31,~~June 30, 2021 from $350.0 million at December 31, 2020, , which primarily reflected the deployment of excess liquidity into the investment portfolio. Conversely, cash and cash equivalents decreased ~~$57.3~~$99.9 million, or ~~36.7%~~64.1%, to ~~$98.5~~$55.9 million at ~~March 31,~~June 30, 2021 from $155.8 million at December 31, 2020. Total deposits increased ~~$35.4~~$50.7 million, or ~~2.7%~~3.9%, to ~~$1.323~~$1.338 billion at ~~March 31,~~June 30, 2021 from $1.287 billion at December 31, 2020. Specifically, ~~non-interest bearing~~non-interest-bearing deposits increased ~~$48.0~~$40.9 million, or ~~17.7%~~15.1%, due primarily to second round PPP loan funding and additional fiscal stimulus ~~payments. Partially offsetting the~~payments, coupled with an increase ~~in non-interest bearing deposits was a $12.7 million, or 1.2%, reduction~~ in interest-bearing deposits ~~reflecting the continued runoff and migration~~ of ~~certificates of deposit.~~$9.8 million, or 1.0%. Borrowed funds remained constant at $10.3 million at ~~March 31,~~June 30, 2021 and December 31, 2020, comprised entirely of $10.3 million in FNCB's junior subordinated debentures.

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Cash and Cash Equivalents

Cash and cash equivalents decreased ~~$57.3~~$99.9 million, or ~~36.7%~~64.1%, to ~~$98.5~~$55.9 million at ~~March 31,~~June 30, 2021 from $155.8 million at December 31, 2020. The decrease was primarily due to the utilization of funds to purchase available-for-sale debt ~~securities.~~securities and fund loan growth. In addition, FNCB paid dividends ~~of $0.06~~totaling $0.120 per share for the ~~three~~six months ended ~~March 31,~~June 30, 2021, an increase of 9.1% compared to dividends of ~~$0.055~~$0.110 per share paid for the same ~~quarter~~period of 2020.
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Securities

FNCB’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and interest income to increase profitability. Additionally, the investment securities portfolio is used to meet pledging requirements to secure public deposits and for other purposes. Debt securities are classified as either held-to-maturity or available-for-sale at the time of purchase based on 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 ~~March 31,~~June 30, 2021 and December 31, 2020, 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 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- and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies.

At ~~March 31,~~June 30, 2021, 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”). FNCB also holds investments, to a lesser extent, in private ~~CMOs,~~CMO's, 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- and privately-traded 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 ~~March 31,~~June 30, 2021.

The following table presents the carrying value of debt securities, all of which were classified as available-for-sale and carried at fair value at ~~March 31,~~June 30, 2021 and December 31, 2020:

Composition of Available-for-Sale Debt Securities

March 31,

December 31,

June 30,

December 31,

(in thousands)

2021

2020

2021

2020

Available-for-sale debt securities:

U.S. Treasury securities $ 1,916 $ - $ 5,124 $ -
Obligations of state and political subdivisions
205,628 205,828 215,389 205,828
U.S. government/government-sponsored agencies:

Collateralized mortgage obligations - residential
106,430 56,972 107,000 56,972
Collateralized mortgage obligations - commercial
3,803 3,904 3,821 3,904
Mortgage-backed securities
16,367 13,026 19,976 13,026
Private collateralized mortgage obligations
37,512 38,199 41,247 38,199
Corporate debt securities
26,272 24,580 29,688 24,580
Asset-backed securities
9,468 7,526 10,562 7,526
Total available-for-sale debt securities $ 407,396 $ 350,035 $ 432,807 $ 350,035

Activity related to available-for-sale debt securities within the investment portfolio during the first ~~quarter~~half of 2021 primarily reflected an asset/liability strategy to deploy a portion of excess ~~liquidity~~cash into the investment portfolio to enhance net interest income. AsThe deployment was the main factor contributing to a ~~result of the deployment,~~$82.8 million, or 23.6%, increase in available-for-sale debt securities ~~increased $57.4 million, or 16.4%,~~ to ~~$407.4~~$432.8 million at ~~March 31,~~June 30, 2021 from $350.0 million at December 31, 2020. Specifically, during the ~~three~~six months ended ~~March 31,~~June 30, 2021, FNCB purchased 3159 available-for-sale debt securities ~~including 15~~with an aggregate principal balance of $104.1 million and a weighted-average yield of 1.42%. The majority of the purchases were U.S. government-sponsored agency CMOs 4and taxable and tax-exempt obligations of state and political subdivisions, 4 taxable obligations of state and political subdivisions, 3 corporate debt securities, 3 private asset-backed securities, 1 private CMO and 1 U.S. Treasury security. The securities purchased had an aggregatesubdivisions. Security sales, principal ~~balance of $73.6 million~~repayments and a ~~weighted-average yield~~decrease in the market value of ~~1.10%.~~the available-for-sale portfolio due to an increase in market interest rates partially offset the increase due to the purchases. During the ~~three~~six months ended ~~March 31,~~June 30, 2021, FNCB sold 3three taxable obligations of state and political subdivisions with an aggregate amortized cost of $2.8 million with a weighted-average yield of 2.78%. FNCB received gross proceeds of $3.0 million and realized a net gain of $213 thousand upon the sales, which is included in non-interest income.
Investment securities averaged $385.7 million for the six months ended June 30, 2021, an increase of $97.9 million, or 34.0%, from $287.8 million for the same six months of 2020. Taxable securities averaged $50.8 million, or 20.0%, higher, while average tax-exempt securities increased $47.1 million, or 147.5%. Moreover, the investment portfolio played a more prominent role in FNCB's mix of earning assets, as average investments comprised 28.5% of average earning assets for the year-to-date period ending June 30, 2021 compared to 24.5% for the same year-to-date period of 2020. The tax-equivalent yield on the investment portfolio decreased 20 basis points to 2.74% from 2.94% comparing the six months ended June 30, 2021 and 2020, respectively.
The majority of FNCB's debt securities are fixed-rate instruments and inherently subject to interest rate risk, as the value of the security fluctuates with changes in interest rates. U.S. Treasury rates rebounded somewhat during the first half of 2021. Specifically, the 2-year U.S. Treasury rate increased 12 basis points to 0.25% at June 30, 2021 from 0.13% at December 31, 2020, while the 10-year U.S. Treasury rate increased 54 basis points to 1.47% at June 30, 2021 from 0.93% at December 31, 2020. Generally, a security's value reacts inversely with changes in interest rates. Available-for-sale securities are carried at fair value, with unrealized gains or losses reported in the accumulated other comprehensive income component of shareholder's equity net of deferred income taxes. At June 30, 2021, FNCB reported net unrealized gains $11.2 million, net of deferred income taxes of $3.0 million, included accumulated other comprehensive income, a decrease of $2.8 million compared to net unrealized holding gains of $14.0 million, net of deferred income taxes of $3.7 million, at December 31, 2020.
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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, 2021, the third-party consultant concluded that each 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, 2021. Management also monitors municipal securities monthly using a third-party Municipal Surveillance Report.

The following table presents the maturities of available-for-sale debt securities, based on carrying value at ~~March 31,~~June 30, 2021 and the weighted-average yields of such securities calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. The yields on tax-exempt obligations of state and political subdivisions are presented on a tax-equivalent basis using the federal corporate income tax rate of 21.0%. Because residential, commercial and 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 Available-for-Sale Debt Securities

March 31, 2021

(dollars in thousands)

< 1 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. Treasury securities $ - $ - $ 1,916 $ - $ - $ 1,916
Yield
1.23 % 1.23 %
Obligations of state and political subdivisions
4,696 66,570 18,290 116,072 - 205,628
Yield
2.42 % 2.97 % 2.88 % 2.83 % 2.87 %
U.S. government/government-sponsored agencies:

Collateralized mortgage obligations - residential
- - - - 106,430 106,430
Yield
1.83 % 1.83 %
Collateralized mortgage obligations - commercial
- - - - 3,803 3,803
Yield
1.98 % 1.98 %
Mortgage-backed securities
- - - - 16,367 16,367
Yield
2.63 % 2.63 %
Private collateralized mortgage obligations
- - - - 37,512 37,512
Yield
2.49 % 2.49 %
Corporate debt securities
- 1,005 25,267 - - 26,272
Yield 6.50 % 5.04 % 5.10 %
Asset-backed securities
- - - - 9,468 9,468
Yield
1.47 % 1.47 %
Total available-for-sale debt securities
$ 4,696 $ 67,575 $ 45,473 $ 116,072 $ 173,580 $ 407,396
Weighted average yield
2.42 % 3.02 % 4.01 % 2.83 % 2.03 % 2.65 %

June 30, 2021

(dollars in thousands)

< 1 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. Treasury securities
$ - $ - $ 5,124 $ - $ - $ 5,124
Yield
1.24 % 1.24 %
Obligations of state and political subdivisions
4,674 66,766 19,706 124,243 - 215,389
Yield
2.42 % 2.96 % 2.81 % 2.81 % 2.85 %
U.S. government/government-sponsored agencies:

Collateralized mortgage obligations - residential
- - - - 107,000 107,000
Yield
1.69 % 1.69 %
Collateralized mortgage obligations - commercial
- - - - 3,821 3,821
Yield
1.98 % 1.98 %
Mortgage-backed securities
- - - - 19,976 19,976
Yield
1.99 % 1.99 %
Private collateralized mortgage obligations
- - - - 41,247 41,247
Yield
2.52 % 2.52 %
Corporate debt securities
- 1,006 28,682 - - 29,688
Yield
6.50 % 4.90 % 4.95 %
Asset-backed securities
- - - - 10,562 10,562
Yield
1.45 % 1.45 %
Total available-for-sale debt securities
$ 4,674 $ 67,772 $ 53,512 $ 124,243 $ 182,606 $ 432,807
Weighted average yield
2.42 % 3.01 % 3.78 % 2.81 % 1.90 % 2.57 %

OTTI Evaluation

There was no OTTI recognized during the ~~three~~six months ended ~~March 31,~~June 30, 2021 or 2020. For additional information regarding management’s evaluation of securities for OTTI, see Note 3, “Securities” of the notes to consolidated financial statements included in Item 1 ~~hereof.~~to this Quarterly Report on Form 10-Q.

Restricted Securities

The following table presents the investment in FNCB’s restricted securities, which have limited marketability and are carried at cost, at ~~March 31,~~June 30, 2021 and December 31, 2020:

March 31,

December 31,

June 30,

December 31,

(in thousands)

2021

2020

2021

2020

Stock in Federal Home Loan Bank of Pittsburgh $ 1,139 $ 1,735 $ 1,089 $ 1,735
Stock in Atlantic Community Banker's Bank
10 10 10 �� 10
Total restricted securities, at cost $ 1,149 $ 1,745 $ 1,099 $ 1,745

Management noted no indicators of impairment for the Federal Home Loan Bank of Pittsburgh or Atlantic Community Banker’s Bank stock at ~~March 31,~~June 30, 2021 and December 31, 2020.
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Equity Securities

Included in equity securities with readily determinable fair values at ~~March 31,~~June 30, 2021 and December 31, 2020 were investments in the common or preferred stock of publicly traded bank holding companies and an investment in a mutual fund comprised of 1-4 family residential mortgage-backed securities collateralized by properties within FNCB’s market area. The cost basis and fair value of equity securities totaled $3.4 million and $4.3 million, respectively, at ~~March 31,~~June 30, 2021 and $2.5 million and $3.0 million, respectively, at December 31, 2020. During the first quarter of 2021, FNCB purchased investments in the common stock of two publicly-traded bank holding companies with an aggregate cost of $877 thousand. Equity securities with readily determinable fair values are reported at fair value with net unrealized gains and losses recognized in the consolidated statements of income. FNCB recognized net gains on equity securities included in non-interest income of ~~$364~~$400 thousand for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and ~~$14~~$18 thousand for the same ~~three~~six months of 2020.
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Equity Securities without Readily Determinable Fair Values

At ~~March 31,~~June 30, 2021 and December 31, 2020, equity securities without readily determinable fair values consisted of a $500 thousand investment in a fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company, which is included in other assets in the consolidated statement of financial condition. The preferred stock pays quarterly dividends at an annual rate of 8.25%, which commenced on March 30, 2021. The preferred stock of this bank holding company is not traded on any established market and is accounted for as an equity security without a determinable fair value. Under 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. As part of its qualitative assessment, management engaged an independent third party to provide a valuation of this investment as of ~~March 31,~~June 30, 2021, which indicated that the investment was not impaired. Management determined that no adjustment for impairment was required at ~~March~~June 30, 2021 and December 31, ~~2021.~~2020.

Loans

Total loans, gross, increased ~~$32.3~~$76.5 million, or ~~3.6%~~8.5%, to ~~$935.6~~$979.8 million at ~~March 31,~~June 30, 2021 from $903.3 million at December 31, ~~2020, which was predominantly due~~2020. The growth in the loan portfolio primarily reflected increases in residential and commercial real estate loans, commercial and industrial loans and loans to ~~the origination~~state and ~~funding of the second round of PPP~~political subdivisions. Partially offsetting these increases were reductions in construction, land acquisition and development loans ~~net of forgiveness received~~and consumer loans. With respect to commercial and industrial loans, on ~~first round PPP loans that were originated in 2020. On~~ January 19, 2021, the SBA fully re-opened the loan portal and began accepting applications for a second round of PPP ~~loans.~~loans, which then ceased to accept applications on May 31, 2021. During the first ~~quarter~~half of 2021, FNCB originated and received funding for ~~540~~679 PPP loans totaling ~~$59.0 million~~$76.2 million. FNCB also continued to assist PPP customers in ~~funding.~~applying for forgiveness. As of ~~March 31,~~June 30, 2021, PPP loans outstanding were ~~$107.4~~$85.8 million, an increase of ~~$28.8~~$7.2 million from $78.6 million outstanding at December 31, 2020. ~~The SBA will cease to accept applications under the second round funding on May 31, 2021.~~ FNCB received forgiveness on ~~first round~~ PPP loans of ~~$30.2~~$69.1 million during the ~~three~~six months ended ~~March 31,~~June 30, 2021 and expects to receive forgiveness for the majority of the balance PPP loans outstanding by the end of 2021. Excluding PPP loans, FNCB experienced modest growth in commercial and residential real estate loans. The increases in these major loan categories were partially offset by a reductions in construction, land acquisition and development loans, state and political subdivision loans and consumer loans.

From a collateral standpoint, a majority of FNCB’s loan portfolio consists of loans secured by real estate. Real estate secured loans, which include commercial real estate, construction, land acquisition and development, residential real estate loans, increased ~~$11.9~~$58.4 million, or ~~2.3%~~11.0%, to ~~$541.9~~$588.4 million at ~~March 31,~~June 30, 2021 from $530.0 million at December 31, 2020. The increase was concentrated in commercial real estate. Real estate secured loans represented ~~57.9%~~60.0% and 58.7% of gross loans at ~~March 31,~~June 30, 2021 and December 31, 2020, respectively.

Commercial real estate loans increased ~~$12.7~~$50.3 million, or ~~4.6%~~18.4%, to ~~$286.6~~$324.2 million at ~~March 31,~~June 30, 2021 from $273.9 million at December 31, 2020. Commercial real estate loans include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. Commercial and industrial loans, which consist primarily of equipment loans, working capital financing, revolving lines of credit and loans secured by cash and marketable securities and PPP loans,increased ~~$25.8~~$9.8 million, or ~~10.8%~~4.1%, to ~~$264.3~~$248.2 million at ~~March 31,~~June 30, 2021 from ~~$238.5~~$238.4 million at December 31, 2020. Construction, land acquisition and development loans decreased ~~$3.0~~$6.2 million, or ~~4.9%~~10.2%, to ~~$56.8~~$53.6 million at ~~March 31,~~June 30, 2021 from $59.8 million at December 31, 2020.

~~Residential real estate loans totaled $198.5 million at March 31, 2021, an increase of $2.2 million, or 1.1%~~, ~~from $196.3 million at December 31, 2020.~~ Residential real estate loans include fixed-rate and variable-rate, amortizing mortgage loans, home equity term loans and home equity lines of credit ("HELOCs"). FNCB primarily underwrites fixed-rate residential mortgage loans for sale in the secondary market to reduce interest rate risk and provide funding for additional loans. Additionally, FNCB offers its proprietary “WOW” mortgage product, which is a non-saleable mortgage with maturity terms of 7.5 to 19.5 years that provides customers with an attractive fixed interest rate and low closing ~~costs and a guaranteed 30-day close.~~ costs. Residential real estate loans totaled $210.5 million at June 30, 2021, an increase of $14.2 million, or 7.2%, from $196.3 million at December 31, 2020. The increase was largely due to strong demand for the WOW mortgage product, the balance of which increased $14.6 million, or 20.0%, to $87.5 million at June 30, 2021 from $72.9 million at December 31, 2020.

Consumer loans, which are primarily comprised of indirect automobile loans, decreased by ~~$3.4~~$4.4 million, or ~~3.9%~~5.1%, to ~~$82.5~~$81.5 million at ~~March 31,~~June 30, 2021 from $85.9 million at December 31, 2020. ~~FNCB did not aggressively compete for indirect automobile loans in the first quarter of 2021.~~ Loans to state and political subdivisions ~~decreased $2.1~~increased $12.8 million, or ~~4.3%~~26.0%, to ~~$46.9~~$61.8 million at ~~March 31,~~June 30, 2021 from $49.0 million at December 31, 2020.
Loans, net of net deferred loan origination fees and unearned income, averaged $937.5 million for the six months ended June 30, 2021, an increase of $59.8million, or 6.8%, from $877.7 million for the same six months of 2020. Taxable loans averaged $63.8 million, or 7.7%, higher due largely to PPP loan originations. Conversely, average tax-exempt loans decreased $4.0 million, or 8.0%. Average loans comprised 69.3% of average earning assets for the year-to-date period ending June 30, 2021 compared to 74.9% for the same year-to-date period of 2020. The tax-equivalent yield on the loan portfolio increased 11 basis points to 4.31% from 4.20% comparing the six months ended June 30, 2021 and 2020, respectively, which reflected the recognition of $2.3 million in net loan origination fees for forgiven PPP loans and $0.2 million in net loan origination fees on the early payoff of two Main Street Lending Program loans.
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The following table presents loans receivable, net by major category at ~~March 31,~~June 30, 2021 and December 31, 2020:

Loan Portfolio Detail

March 31,

December 31,

(in thousands)

2021

2020

Residential real estate
$ 198,519 $ 196,328
Commercial real estate
286,575 273,903
Construction, land acquisition and development
56,857 59,785
Commercial and industrial
264,267 238,435
Consumer
82,521 85,881
State and political subdivisions
46,891 49,009
Total loans, gross
935,630 903,341
Unearned income
(116 ) (110 )
Net deferred loan costs
(3,571 ) (2,129 )
Allowance for loan and lease losses
(12,076 ) (11,950 )
Loans, net
$ 919,867 $ 889,152
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 March 31, 2021 or December 31, 2020. 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.
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~~The following table presents industry concentrations within FNCB’s loan portfolio at March 31, 2021 and December 31, 2020:~~
~~Loan Concentrations~~

March 31, 2021

December 31, 2020

(in thousands)

Amount
% of Gross Loans
Amount
% of Gross Loans
1-4 family residential investment properties
$ 64,938 6.94 % $ 58,114 6.43 %
Retail space/shopping centers
46,534 4.97 % 43,926 4.86 %

June 30,

December 31,

(in thousands)

2021

2020

Residential real estate
$ 210,493 $ 196,328
Commercial real estate
324,239 273,903
Construction, land acquisition and development
53,659 59,785
Commercial and industrial
248,228 238,435
Consumer
81,459 85,881
State and political subdivisions
61,774 49,009
Total loans, gross
979,852 903,341
Unearned income
(268 ) (110 )
Net deferred loan fees
(3,046 ) (2,129 )
Allowance for loan and lease losses
(12,285 ) (11,950 )
Loans, net
$ 964,253 $ 889,152

Modifications Related to COVID-19

In late March 2020, the federal banking regulators issued guidance encouraging banks to work prudently with and provide short-term payment accommodations to borrowers affected by COVID-19. Additionally, Section 4013 of the CARES Act addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 do not need to be classified as TDRs. These modifications provided borrowers with a short-term, typically three-month, interest-only period or full payment deferral. The provisions under Section 4013 of the CARES Act originally were set to expire on December 31, 2020. The Consolidated Appropriations Act ("CAA") was signed into law on December 27, 2020. Section 541 of the CAA extended the provisions of Section 4013 of the CARES Act to January 1, 2022. Management is closely ~~monitoring~~monitors all loans for which a payment deferral has been granted and will continue to follow regulatory guidance when working with the borrowers which have been impacted by COVID-19 and apply the provisions of the CARES Act in making any TDR determinations. As of ~~March 31,~~June 30, 2021, there were 10four loans with an aggregate recorded investment of ~~$5.3~~$5.2 million that were still under deferral. The deferral period for all four loans are expected to expire in the third quarter of 2021, at which time the loans will return to their contracted payment terms.

Asset Quality

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by the ALLL. The ALLL is established through a provision for loan and lease losses charged to earnings.

FNCB has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of the Chief Lending Officer and loan officers, the Chief Credit Officer, the loan review function, and the Credit Risk Management, ALLL, Officers Loan and Directors Loan Committees, as well as through oversight of the Board of Directors. Management continually evaluates its credit risk management practices to ensure it is reacting to problems in the loan portfolio in a timely manner, although, as is the case with any financial institution, a certain degree of credit risk is dependent in part on local and general economic conditions that are beyond management’s control.

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 fromfinance, legal, lending and credit administration, 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 determined 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, collateral evaluations and 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 collateral evaluation or 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. 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 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. FNCB conservatively considers all TDRs to be impaired.

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

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Management actively manages impaired loans in an effort to 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. In 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, management generally estimates selling costs using a factor of 10%, 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 determined to be zero.

The following table presents information about non-performing assets and accruing TDRs at ~~March 31,~~June 30, 2021 and December 31, 2020:

Non-performing Assets and Accruing TDRs

March 31,

December 31,

June 30,

December 31,

(dollars in thousands)

2021

2020

2021

2020

Non-accrual loans
$ 4,842 $ 5,581 $ 4,555 $ 5,581
Loans past due 90 days or more and still accruing
- - - -
Total non-performing loans
4,842 5,581 4,555 5,581
Other real estate owned
58 58 236 58
Other non-performing assets
1,900 1,900 1,773 1,900
Total non-performing assets
$ 6,800 $ 7,539 $ 6,564 $ 7,539

Accruing TDRs
$ 6,962 $ 6,975 $ 6,823 $ 6,975
Non-performing loans as a percentage of gross loans
0.52 % 0.62 % 0.47 % 0.62 %

FNCB's asset quality ~~was favorable~~metrics continued to improve during the first ~~quarter~~half of 2021. Total non-performing assets decreased ~~$739~~$975 thousand, or ~~9.8%~~12.9%, to ~~$6.8~~$6.6 million at ~~March 31,~~June 30, 2021 from $7.5 million at December 31, 2020. The improvement was attributable to a decrease in non-accrual loans, which primarily reflected the payoff of one commercial loan relationship, ~~and~~ the return of two commercial loan relationships to accrual ~~status.~~status and one residential property that was transferred to OREO. FNCB’s ratio of non-performing loans to total gross loans improved to ~~0.52%~~0.46% at ~~March 31,~~June 30, 2021 from 0.62% at December 31, 2020. Additionally, FNCB’s ratio of non-performing assets as a percentage of shareholders’ equity improved to ~~4.4%~~4.1% at ~~March 31,~~June 30, 2021 from 4.8% at December 31, 2020, due to the reduction in non-performing assets. While asset quality ~~metrics improved comparing March 31, 2021 and December 31, 2020,~~remained favorable, management believes ~~fallout~~continuing challenges from the COVID-19 pandemic ~~may~~could still have an adverse effect on asset quality in the future. ~~Prolonged~~Any further disruption to ~~FNCB's customers~~economic activity due to an acceleration in COVID-19 cases, and any related actions taken by governments, businesses or individuals, could result in increased loan delinquencies, defaults and collateral devaluations. Management actively manages problem credits through workout efforts focused on developing strategies to resolve borrower difficulties through liquidation of collateral and other appropriate means. Additionally, management continues to monitor non-accrual loans, delinquency trends and economic conditions within FNCB’s market area on an on-going basis in order to proactively address any collection-related issues and mitigate any potential losses.

Other non-performing assets ~~at March 31, 2021 and December 31, 2020~~ was comprised solely of a classified account receivable, the balance of which was $1.8 million at June 30, 2021 and $1.9 million at December 31, 2020. The receivable is secured by an evergreen letter of credit ~~in the amount of $1.9 million,~~that was received in 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, Pennsylvania. The agreement provides for payment to FNCB as real estate building lots are sold. The project was stalled due to a decline in real estate values in this area following the financial crisis of 2008. 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. To date, no single-unit lots have been sold, however, the developer completed the construction of a seven-unit building that houses timeshare units and owners began occupying the units in the fourth quarter of 2020. In 2020, management negotiated a repayment plan with the developer. FNCB received the first payment of $127 thousand in the second quarter of 2021. Management continues to closely monitor this ~~project closely and is currently in negotiations with~~project. While the ~~developer to establish a~~ repayment plan ~~beginning in 2021. However,~~has commenced, economic uncertainty and ~~economic~~ volatility associated with the COVID-19 pandemic are still unknown and could negatively impact the timing of sales and payments.

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Table of Contents
There were no loans modified as TDRs during the three and six months ended ~~March 31,~~June 30, 2021. There were three commercial and industrial loans and one residential mortgage loan modified as TDRs during the three and six months ended June 30, 2020. The three commercial and industrial loans were modified under forbearance agreements and had an aggregate pre-and post-modification recorded investment of $196 thousand. The one residential mortgage loan that was modified as a TDR involved an extension of terms and the loan has a pre-and post-modification recorded investment of $88 thousand.  There were no TDRs modified within the previous 12 months that defaulted during the three and six months ended June 30, 2021 and 2020.
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The following table presents the changes in non-performing loans for the three and six months ended ~~March 31,~~June 30, 2021 and 2020. Loan foreclosures represent recorded investment at time of foreclosure not including the effect of any guarantees.

Changes in Non-Performing Loans

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

2021

2020

2021

2020

2021

2020

Balance, beginning of period
$ 5,581 $ 9,084 $ 4,842 $ 8,576 $ 5,581 $ 9,084
Loans newly placed on non-accrual
391 719 525 717 916 1,436
Loans returned to performing status
(224 ) (48 ) (244 ) (1,521 ) (468 ) (1,569 )
Loans transferred to OREO
(133 ) �� - (133 ) -
Loan foreclosures
- - - - - .
Loans charged-off
(346 ) (314 ) (125 ) (310 ) (471 ) (624 )
Loan payments received
(560 ) (865 ) (310 ) (722 ) (870 ) (1,587 )
Balance, end of period
$ 4,842 $ 8,576 $ 4,555 $ 6,740 $ 4,555 $ 6,740

The average balance of impaired loans was $11.3 million for both the three and ~~$15.2~~six months ended June 30, 2021, compared to $14.8 million and $15.0 million, respectively, for the three and six months ended ~~March 31, 2021 and~~June 30, 2020. FNCB recognized $7876 thousand and ~~$91~~$154 thousand of interest income on impaired loans for the three and six months ended ~~March 31, 2021and 2020, respectively.~~June 30, 2021, respectively and $98 thousand and $189 thousand for the respective periods of 2020.

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 six months ended ~~March 31,~~June 30, 2021 approximated $6055 thousand and ~~$111~~$115 thousand, respectively, and $94 thousand and $205 thousand for the ~~same quarter~~respective periods of 2020.

The following table presents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at ~~March 31,~~June 30, 2021 and December 31, 2020:

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~~Table of Contents~~
Loan Delinquencies and Non-Accrual Loans

March 31,

December 31,

June 30,

December 31,

2021

2020

2021

2020

Accruing:

30-59 days
0.15 % 0.31 % 0.08 % 0.31 %
60-89 days
0.03 % 0.06 % 0.01 % 0.06 %
90+ days
0.00 % 0.00 % 0.00 % 0.00 %
Non-accrual
0.52 % 0.62 % 0.47 % 0.62 %
Total delinquencies
0.70 % 0.99 % 0.56 % 0.99 %

Total ~~delinquencies as a percent~~delinquent loans, including non-accrual loans, were $5.5 million, or 0.56% of gross loans, ~~were 0.70%~~ at ~~March 31,~~June 30, 2021, compared to $8.9 million, or 0.99% of gross loans, at December 31, 2020. The ~~decrease~~improvement in ~~total delinquent loans~~delinquencies was ~~primarily~~ due to primarily to a ~~decrease in non-accrual loans of$739 thousand, coupled with a $0.4 million~~ decrease in accruing loans past due 30-59 days of $1.9 million, coupled with decreases in non-accrual loans and accruing loans past due 60-89 ~~days.~~days of$1.0 million and $0.5 million, respectively.
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Allowance for Loan and Lease Losses

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

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

•
changes in national, local, and business economic conditions and developments, including the condition of various market segments;
•
changes in the nature and volume of the loan portfolio;
•
changes in lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices and results;
•
changes in the experience, ability and depth of lending management and staff;
•
changes in the quality of the loan review system and the degree of oversight by the Board of Directors;
•
changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual loans, TDRs and other loan modifications;
•
the existence and effect of any concentrations of credit and changes in the level of such concentrations;
•
the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portfolio; and
•
analysis of customers’ credit quality, including knowledge of their operating environment and financial condition.

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

For purposes of 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~~Regarding 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 equaled ~~$12.1~~$12.3 million ~~or 1.30% of total loans~~ at ~~March 31,~~June 30, 2021, compared to $11.9 million at December 31, 2020. The slight increase resulted from $~~186~~341 thousand in provisions for loan and lease losses for the ~~three~~six months ended ~~March 31,~~June 30, 2021, which was ~~partially~~slightly offset by ~~$60~~$6 thousand in net charge-offs for the same time 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 ~~$473~~$250 thousand, or ~~3.9%~~2.0%, of the total ALLL at ~~March 31,~~June 30, 2021, compared to $416 thousand, or 3.5%, of the total ALLL at December 31, 2020. A general allocation of $~~11.6~~12.0 million was calculated for loans analyzed collectively under ASC 450 “Contingencies” (“ASC 450”), which represented ~~96.1%~~98.0% of the total ALLL of ~~$12.1~~$12.3 million. Comparatively, at December 31, 2020, the general allocation for loans collectively analyzed for impairment amounted to $11.5 million, or 96.5%, of the total ALLL. Included in the general component of the ALLL was an unallocated reserve of $1.1 million, at both ~~March 31,2021~~June 30, 2021 and December 31, 2020. Based on its evaluations, management may establish an unallocated component to cover any inherent losses that exist as of the evaluation date, but which may not have been identified under the methodology. The increase in the unallocated reserve was directly related to the increase in credit provisioning during the year ended December 31, 2020 due to the economic disruption caused by the COVID-19 pandemic. Based on its evaluation at ~~March 31,~~June 30, 2021, management decided to maintain the unallocated component at a similar level to the level at December 31, 2020. As of ~~March 31,~~June 30, 2021, FNCB has not experienced asset quality deterioration or an increase in credit losses related to the pandemic. However, management continues to monitor the loan portfolio for any potential adverse impact to FNCB's asset quality that may develop due to ~~fallout~~continuing challenges from the pandemic. The ratio of the ALLL to total loans decreased to ~~1.30%~~1.26% of total loans, net of net deferred loan origination fees and unearned income, of ~~$931.9~~$976.5 million at ~~March 31,~~June 30, 2021 from 1.33% of total loans, net of net deferred loan costs and unearned income, of $901.1 million at December 31, 2020. Excluding PPP loans, the ALLL as a percentage of gross loans equaled ~~1.46%~~1.37% at ~~March 31,~~June 30, 2021 and 1.45% at December 31, 2020.

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The following table presents an allocation of the ALLL by major loan category and percent of loans in each category to total loans at ~~March 31,~~June 30, 2021 and December 31, 2020:

Allocation of the ALLL

March 31, 2021

December 31, 2020

June 30, 2021

December 31, 2020

Percentage

Percentage

Percentage

Percentage

of Loans

of Loans

of Loans

of Loans

in Each

in Each

in Each

in Each

Category

Category

Category

Category

Allowance

to Total

Allowance

to Total

Allowance

to Total

Allowance

to Total

(dollars in thousands)

Amount

Loans

Amount

Loans

Amount

Loans

Amount

Loans

Residential real estate
$ 1,732 21.22 % $ 1,715 21.73 % $ 1,858 21.48 % $ 1,715 21.73 %
Commercial real estate
4,521 30.63 % 4,268 30.32 % 4,648 33.09 % 4,268 30.32 %
Construction, land acquisition and development
516 6.08 % 538 6.62 % 493 5.48 % 538 6.62 %
Commercial and industrial
2,603 28.24 % 2,619 26.39 % 2,483 25.33 % 2,619 26.39 %
Consumer
1,219 8.82 % 1,319 9.51 % 1,177 8.31 % 1,319 9.51 %
State and political subdivision
387 5.01 % 405 5.43 % 509 6.31 % 405 5.43 %
Unallocated 1,098 0.00 % 1,086 0.00 % 1,117 - 1,086 -
Total
$ 12,076 100.00 % $ 11,950 100.00 % $ 12,285 100.00 % $ 11,950 100.00 %

The following table presents an analysis of the ALLL by loan category for the three and six months ended ~~March 31,~~June 30, 2021 and 2020:

Reconciliation of the ALLL

For the Three Months Ended March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

(dollars in thousands)

2021

2020

2021

2020

2021

2020

Balance at beginning of period
$ 11,950 $ 8,950 $ 12,076 $ 9,907 $ 11,950 $ 8,950
Charge-offs:

Residential real estate
- - 6 - 6 -
Commercial real estate
- 56 - - - 56
Construction, land acquisition and development
- - - - - -
Commercial and industrial
19 35 11 92 30 127
Consumer
342 238 119 224 461 462
State and political subdivisions
- - - - - -
Total charge-offs
361 329 136 316 497 645
Recoveries of charged-off loans:

Residential real estate
3 2 13 37 16 39
Commercial real estate
46 - - 1 46 1
Construction, land acquisition and development
- - - - - -
Commercial and industrial
25 59 7 425 32 484
Consumer
227 74 170 139 397 213
State and political subdivisions
- - - - - -
Total recoveries
301 135 190 602 491 737
Net charge-offs
60 194
Net (recoveries) charge-offs
(54 ) (286 ) 6 (92 )
Provision for loan and lease losses
186 1,151 155 831 341 1,982
Balance at end of period
$ 12,076 $ 9,907 $ 12,285 $ 11,024 $ 12,285 $ 11,024

Net charge-offs as a percentage of average loans
0.01 % 0.02 %
Net (recoveries) charge-offs as a percentage of average loans
(0.01 )% (0.03 )% - (0.01 )%

Allowance for loan and lease losses as a percentage of gross loans outstanding at period end
1.30 % 1.19 %
Allowance for loan and lease losses as a percentage of gross loans outstanding at period end, excluding PPP Loans
1.46 % 1.19 %
Allowance for loan and lease losses as a percentage of loans, net
1.26 % 1.16 % 1.26 % 1.16 %
Allowance for loan and lease losses as a percentage of loans, net at period end, excluding PPP Loans
1.37 % 1.32 % 1.37 % 1.32 %
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Other Real Estate Owned

There was one piece of commercial land with a carrying value of $58 thousand held in OREO at March 31, 2021 and December 31, 2020. There were no valuation adjustments recorded to the carrying value of OREO property duringDuring the three and six months ended March 31, 2021 and 2020. 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 $10 thousand and $55~~thousand for the three months ended March 31, 2021 and 2020, respectively.~~
~~There were no OREO properties sold during the three months ended March 31, 2021. At March 31,~~June 30, 2021, FNCB ~~was in the process of negotiating~~obtained a deed in lieu of foreclosure for a residential mortgage with a recorded investment of $138 thousand. FNCB accepted an offer of $205 thousand and the property went under an agreement of sale with closing anticipated in the third quarter of 2021. FNCB transferred the property to OREO at the selling price, less the estimated cost to sell, of $178 thousand and recorded a positive valuation adjustment of $40 thousand which is included in non-interest income for the three and six months ended June 30, 2021. Additionally, there was one residential mortgage loan with a recorded investment of ~~$133 thousand. The deed~~$94 thousand that was in ~~lieu~~the process of foreclosure ~~was finalized and the property transferred to OREO in April~~at June 30, 2021. ~~During the three months ended March 31, 2020, there was one~~
There were no residential real estate ~~property~~properties foreclosed upon during the three and six months ended June 30, 2020 or included in OREO which was sold, with a carrying value of $204 thousand. The property sold was collateral supporting an investor-owned residential mortgage loan. The agreement with the investor requires FNCB to take title to the property upon foreclosure and FNCB is responsible for the property liquidation on behalf of the investor after foreclosure. FNCB did not realize any gain or loss upon the sale. at June 30, 2020.
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~~Table of Contents~~

FNCB actively markets OREO properties for sale through a variety of channels including internal marketing and the use of outside brokers/realtors. The carrying value of OREO is generally calculated at an amount not greater than 90% of the most recent fair market appraised value unless specific conditions warrant an exception. A 10% factor is generally used to estimate costs to sell, which is based on typical cost factors, such as 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. This fair value is updated on an annual basis or more frequently if new valuation information is available. Deterioration in the real estate market could result in additional losses on these properties.

Liabilities

Total liabilities consist primarily of total deposits and borrowed funds. During the first ~~quarter~~half of 2021, FNCB experienced strong deposit growth, which was the main factor contributing to a ~~$35.3~~$54.3 million, or ~~2.7%~~4.1%, increase in total liabilities to ~~$1.345~~$1.364 billion at ~~March 31,~~June 30, 2021 from $1.310 billion at December 31, 2020. Total deposits were $1.338 billion at June 30, 2021, an increase of $50.7 million, or 3.9%, from $1.287 billion at December 31, 2020. Specifically, non-interest-bearing demand deposits increased ~~$48.0~~$40.9 million, or ~~17.7%~~15.1%, to ~~$319.5~~$312.4 million at ~~March 31,~~June 30, 2021 from $271.5 million at December 31, 2020. The increase in ~~non-interest bearing~~non-interest-bearing deposits was related to the origination and funding of the second round of PPP loans, coupled with additional fiscal stimulus payments received by depositors in the first ~~quarter~~half of 2021. ~~Conversely, interest-bearing~~Interest-bearing deposits ~~decreased $12.7~~increased $9.8 million, or ~~1.2%~~1.0%, to ~~$1.003~~$1.026 billion at ~~March 31,~~June 30, 2021 from $1.016 billion at December 31, 2020, primarily due to the increase in savings and club accounts, which ~~was concentrated in~~increased $16.3 million, or 14.9%, to $126.0 million at June 30, 2021 from $109.7 million at December 31, 2020. Additionally, interest-bearing demand deposits ~~and time deposits. Specifically, interest-bearing demand deposits decreased $14.8~~increased $8.3 million, or ~~2.1%~~1.2%, to ~~$698.6~~$721.7 million at ~~March 31,~~June 30, 2021, ~~from~~compared to $713.4 million at December 31, ~~2020, which primarily reflected cyclical deposit trends of FNCB's municipal customers. Additionally, continued deposit migration~~2020.  Partially offsetting these increases was ~~the primary factor contributing to an $8.2~~a $14.8 million, or ~~4.3%~~7.7%, decrease in ~~total~~ time deposits to ~~$184.7~~$178.1 million at ~~March 31,~~June 30, 2021 from $192.9 million at December 31, 2020. ~~Partially offsetting these decreases was a $10.3 million, or 9.4%, increase in savings deposits to $120.0 million at March 31, 2021 from $109.7 million at December 31, 2020.~~ Comprised entirely of ~~$10.3 million in~~ junior subordinated debentures, total borrowed funds remained constant at $10.3 million at ~~March 31,~~June 30, 2021 and December 31, 2020. Due to the strong deposit influx and favorable liquidity position, FNCB had no advances through the FHLB of Pittsburgh outstanding at ~~March 31,~~June 30, 2021 and December 31, 2020.

Equity

Total shareholders’ equity ~~decreased~~increased $~~930 thousand,~~4.7 million, or ~~0.6%~~3.1%, to ~~$154.9~~$160.6 million at ~~March 31,~~June 30, 2021 from $155.9 million at December 31, 2020. Book value per common share was $7.99 at June 30, 2021, an increase of $0.29, or 3.8%, compared to $7.70 at December 31, 2020. The ~~primary factor contributing to the reduction~~increase in capital was primarily due to net income for the six months ended June 30, 2021 of $11.1 million, partially offset by $2.4 million in dividends declared and paid for the six months ended June 30, 2021, and a ~~$5.6~~$2.7 million ~~or 40.2%,~~ decrease in accumulated other comprehensive income related primarily to the depreciation in the fair value of FNCB's available-for-sale debt securities, net of deferred taxes. ~~Also contributing~~
Additionally, on January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program under which up to 975,000 shares of FNCB's outstanding common stock may be acquired in the open market. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan, and the repurchased shares will be returned to the ~~decrease in capital were dividends declared and paid~~status of ~~$1.2 million for~~authorized but unissued shares of Common Stock. During the ~~three~~six months ended ~~March 31, 2021. These reductions were partially offset~~June 30, 2021, FNCB repurchased 193,530 shares at a weighted-average price per share of $7.18, or $1.4 million in aggregate. There is not a guarantee as to the exact number of shares that will be repurchased by ~~net income for the three months ended March 31, 2021 of $5.8 million. Book value per common share was $7.65~~FNCB, and FNCB may discontinue at ~~March 31, 2021, a decrease of $0.05, or 0.6%, compared to $7.70 at December 31, 2020.~~any time that management determines additional repurchases are no longer warranted.

The Bank's total regulatory capital increased ~~$6.1~~$12.2 million to ~~$155.2~~$161.4 million at ~~March 31,~~June 30, 2021 from $149.2 million at December 31, 2020. FNCB Bank's total risk-based capital and Tier 1 leverage ratios ~~improved to 16.26%~~were 15.79% and ~~9.88%~~9.90% at ~~March 31,~~June 30, 2021, respectively, compared to 15.79% and 9.57% at December 31, 2020, respectively. The Bank's risk-based capital ratios exceeded the minimum regulatory capital ratios required for well capitalized under prompt corrective action regulations. Based on the most recent notification from its primary regulator, the Bank was considered well capitalized at ~~March 31,~~June 30, 2021 and December 31, 2020. There were no conditions or events since that notification that management believes would have changed this capital designation.
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Liquidity

The term liquidity refers to the ability to generate 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 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. 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.

The statements of cash flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and interest-bearing deposits in other banks, which comprise cash and cash equivalents, are FNCB’s most liquid assets. At ~~March 31,~~June 30, 2021, cash and cash equivalents totaled ~~$98.5~~$55.9 million, a decrease of ~~$57.3~~$99.9 million compared to $155.8 million at December 31, 2020. For the ~~three~~six months ended ~~March 31,~~June 30, 2021 net cash inflows from operating and financing activities were more than entirely offset by net cash used in investing activities during that same time frame. ~~Operating~~Regarding FNCB's operating activities, net income, net of reconciling adjustments, for the ~~three~~six months ended ~~March 31,~~June 30, 2021 provided net cash of ~~$6.0~~$10.4 million. Financing activities provided ~~$34.1~~$46.9 million in net cash ~~flow~~ for the ~~three~~six months ended ~~March 31,~~June 30, 2021, which resulted primarily from the net increase in total deposits of ~~$35.4~~$50.7 million. These net cash inflows were more than entirely offset by the ~~$97.4~~$157.2 million in net cash used byin FNCB's investing activities for the ~~three~~six months ended ~~March 31, 2021, which resulted primarily from the~~June 30, 2021. Specifically, cash used infor purchases of available-for-sale debt securities and equity securities of ~~$73.6~~$99.6 million and $0.9 million, respectively, coupled with ~~$29.6~~a net increase in loans to customers of $73.0 million, ~~for new loan funding,~~ primarily PPP ~~loans. These~~originations, were the primary contributors to the net cash used in investing ~~cash~~activities. Partially offsetting these outflows were ~~partially offset by~~ cash received from sales, maturities, calls and repayments of available-for-sale debt securities totaling ~~$8.8~~$17.1 million.��

Management is actively monitoring FNCB's liquidity position and capital adequacy in light of the changing circumstances related to economic uncertainty brought on by the COVID-19 pandemic. While management believes FNCB's liquidity position is favorable, they are keenly aware that changes in economic conditions related to COVID-19, or in general, 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 the utilization of existing lines of credit as customers manage their own liquidity needs during this time of economic uncertainty. ~~Management~~Despite the $99.9 million decrease in cash and cash equivalents from December 31, 2020, 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 ~~March 31,~~June 30, 2021. In addition to cash and cash equivalents of ~~$98.5~~$55.9 million at ~~March 31,~~June 30, 2021,FNCB had ample sources of additional liquidity including approximately ~~$296.9~~$316.3 million in available borrowing capacity from the FHLB of Pittsburgh and ~~available borrowing capacity through the Federal Reserve Discount Window of $98.7 million under the PPPLF and $14.4~~$14.5 million under the borrower-in-custody program. ~~The $98.7 million in funding availability through the PPPLF expires on June 30, 2021.~~ FNCB also has available unsecured federal funds lines of credit totaling $47.0 million at ~~March 31,~~June 30, 2021.

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~~Table of Contents~~
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") has proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. ARRC had initially proposed that the transition to SOFR from USD-LIBOR would take place by the end of 2021. At the end of 2020, the ICE Benchmark Administration ("IBA"), which complies and oversees LIBOR, commenced a consultation on its intention to extend most of the USD-LIBOR tenors to June 30, 2023, and U.S. banking regulators have expressed support for the extension. Results of the consultation, which concluded on January 25, 2021, reaffirmed the extension of the overnight, ~~1, 3, 6~~1-, 3-, 6- and ~~12 month~~12-month LIBOR tenors through June 30, 2023. FNCB has various loans, investments, borrowings and interest rate swap contracts that are indexed to USD-LIBOR, and management is actively monitoring its LIBOR exposures and evaluating the risks involved.

Asset and Liability Management

The ALCO, comprised of members of the Bank's board of directors, executive management of and other appropriate officers, oversees FNCB's interest rate risk management program. Members of ALCO meet 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;

●
ensure adequate liquidity and funding;

●
maintain a strong capital base; and

●
maximize net interest income opportunities.
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Table of Contents

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 off-balance sheet interest rate contracts to manage interest rate risk. The off-balance sheet interest rate contracts may include 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 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.

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, 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 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 basis points for simulation purposes. The simulation takes into consideration that not all assets and liabilities re-price equally and simultaneously with market rates (i.e., savings rate).

Economic Value at Risk

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

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

●
asset and liability levels using ~~March 31,~~June 30, 2021 as a starting point;

●
cash flows are based on contractual maturity and amortization schedules with applicable prepayments derived from internal historical data and external sources; and

●
cash flows are reinvested into similar instruments so as to keep interest-earning asset and interest-bearing liability levels constant.

42

~~Table of Contents~~
The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points, +200 basis points, and -100 basis points on net interest income and the change in economic value over a one-year time horizon from the ~~March 31,~~June 30, 2021 levels:

Rates +200

Rates +400

Rates -100

Simulation Results

Policy Limit

Simulation Results

Policy Limit

Simulation Results

Policy Limit

Earnings at risk:

Percent change in net interest income
(0.4 )% (12.5 )% 1.0 % (20.0 )% (2.7 )% (10.0 )%

Economic value at risk:

Percent change in economic value of equity
1.9 % (20.0 )% 1.3 % (35.0 )% (23.6 )% (10.0 )%

Rates +200

Rates +400

Rates -100

Simulation Results

Policy Limit

Simulation Results

Policy Limit

Simulation Results

Policy Limit

Earnings at risk:

Percent change in net interest income
0.8 % (12.5 )% 3.7 % (20.0 )% (0.1 )% (10.0 )%

Economic value at risk:

Percent change in economic value of equity
1.4 % (20.0 )% 1.3 % (35.0 )% (20.6 )% (10.0 )%
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Table of Contents

S~~imilar~~Similar to model results at ~~December~~March 31, ~~2020,~~2021, results from the simulation at ~~March 31,~~June 30, 2021 indicated that FNCB's asset/liability position was relatively well matched in the near term, exhibiting only minor sensitivity to changes in interest rates over the next twelve months. According to the model results at ~~March 31, 2021,~~June 30,2021, net interest income is expected to ~~increase 0.8%~~decrease 0.4% under a +200-basis point interest rate shock and decrease ~~0.1%~~2.7% under a -100-basis point rate shock, Additionally, under a parallel shift in interest rates of +200 basis points, FNCB's economic value of equity ("EVE") is expected to increase ~~1.4%~~1.9%. However, EVE is expected to decrease ~~20.6%~~23.6% under a parallel shift in interest rates of -100 basis points, which is outside of ALCO policy guidelines. With the exception of the -100 basis point rate shock on EVE, all modeled exposures of net interest income and EVE were within internal policy guidelines for the next twelve months. Management does not believe that EVE policy exception under the -100-basis point rate shock poses any undue interest rate risk at ~~March 31,~~June 30, 2021. Included in the model was the assumptions that FNCB would receive forgiveness for PPP loans outstanding at ~~March 31,~~June 30, 2021 and recognize the associated loan origination fees to interest income by the end of the first year of the model. Accordingly, results of model project a substantial decrease to net interest income in Year 2 of the model based on these assumptions.

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, 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. In response to the economic disruption and uncertainty brought on by the COVID-19 pandemic, the FOMC lowered the federal funds target rate a total of 150 basis points in two emergency actions with an expectation that the Committee will maintain a low interest rate environment for the foreseeable future. Given FNCB's current asset/liability position, the significantly lower market interest rates may have a negative impact on FNCB's earning asset yields and variable-rate loans and securities indexed to prime and LIBOR will continue to reprice downward.

As previously mentioned, as part of its ongoing monitoring, ALCO 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. As part of its quarterly review, management compared tax-equivalent net interest income recorded for the three months ended ~~March 31,~~June 30, 2021 with tax-equivalent net interest income that was projected for the same three-month period. There was a positive variance between actual and projected tax-equivalent net interest income for the three-month period ended ~~March 31,~~June 30, 2021 of approximately ~~$0.8~~$0.4 million, or ~~7.3%~~2.9%. The variance primarily reflected ~~a difference in the assumption for the volume and timing of the forgiveness of PPP loans, including fee income recognition,~~additional loan growth actually experienced over that used in the ~~model with that actually experienced. Additionally, the previous model at December 31, 2020 did not anticipate the origination of PPP loans under the second round of funding.~~model. ALCO performs a detailed rate/volume analysis between actual and projected results in order to continue to improve the accuracy of its simulation models.

Off-Balance Sheet Arrangements

In the 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 and six months ended ~~March 31,~~June 30, 2021, 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 ~~three~~six months ended ~~March 31,~~June 30, 2021.  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, 2020.

Item 4 — Controls and Procedures

FNCB’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. Based on that evaluation, FNCB’s Chief Executive Officer and Chief Financial Officer concluded FNCB’s disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2021.

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.

43
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Table of Contents

PART II Other Information

Item 1 — Legal Proceedings.

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 Annual Report on Form 10-K for the year ended December 31, 2020.

Item 1A — Risk Factors.

There have been no material changes in the risk factors previously disclosed in FNCB's Annual Report on Form 10-K for the year ended December 31, 2020.

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 ~~three~~six months ended ~~March 31,~~June 30, 2021.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Pursuant to the share repurchase program initially announced by FNCB on January 27, 2021, which expires on December 31, 2021, FNCB may repurchase up to 975,000 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. The following table describes purchases by FNCB under the share repurchase program that settled during each period set forth in the table.  Prices in column (b) include commissions.  Cumulatively, as of ~~March 31,~~June 30, 2021, FNCB had repurchased ~~8,188~~193,530 of its shares under the program at a weighted average purchase price of ~~$6.96~~$7.05 per share, or ~~$57~~$1.4 million thousand in aggregate (including commissions). As of June 30, 2021, FNCB had the authority to repurchase an additional ~~966,812~~781,470 shares under the stock repurchase program.

051_partIIitem2

Total Number

Maximum

Total Number

Maximum

of Shares

Number of

of Shares

Number of

Purchased as

Shares that

Purchased as

Shares that

Total Number

Average Price

Part of Publicly

May Yet be

Total Number

Part of Publicly

May Yet be

of Shares

Average Price

Announced

Purchased under

of Shares

Average Price

Announced

Purchased under

Purchased

Paid Per Share

Programs

the Program

Purchased

Paid Per Share

Programs

the Program

Period

(a)

(b)

(c)

(d)

(a)

(b)

(c)

(d)

January 27, 2021 to January 31, 2021
- $ - - 975,000 - $ - - 975,000
February 1, 2021 to February 28, 2021
8,188 6.96 8,188 966,812 8,188 6.96 8,188 966,812
March 1, 2021 to March 31, 2021
- - - 966,812 - - - 966,812
April 1, 2021 to April 30, 2021
17,889 6.94 17,889 948,923
May 1, 2021 to May 31, 2021
21,780 7.04 21,780 927,143
June 1, 2021 to June 30, 2021
145,673 7.24 145,673 781,470
Total
8,188 $ 6.96 8,188 966,812 193,530 $ 7.05 193,530 781,470

Item 3 - Defaults upon Senior Securities.

None.

Item 4 — Mine Safety Disclosures.

Not applicable.

Item 5 - Other Information.

None.

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Item 6 — Exhibits.

The following exhibits are filed or furnished herewith or 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 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 of FNCB Bancorp, Inc. as of March 25, 2020 - filed as Exhibit 3.1 to FNCB's Form 10-Q for the quarter ended March 31, 2020, as filed on May 4, 2020, is hereby incorporated by 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 (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
**
Furnished herewith

45
48
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.

Date: ~~May 7,~~August 6, 2021
By:
/s/ Gerard A. Champi

Gerard A. Champi

President and Chief Executive Officer

Date: ~~May 7,~~August 6, 2021
By:
/s/ James M. Bone, Jr.

James M. Bone, Jr., CPA

Executive Vice President and Chief Financial Officer

Principal Financial Officer

Date: ~~May 7,~~August 6, 2021
By:
/s/ Stephanie A. Westington

Stephanie A. Westington, CPA

Senior Vice President and Controller

Principal Accounting Officer

4649

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 Quality Indicators*																				*Credit Quality Indicators*
	*March 31, 2021*																				*June 30, 2021*
	*Commercial Loans*												*Other Loans*								*Commercial Loans*												*Other Loans*
			*Special*								*Subtotal*		*Accruing*		*Non-accrual*		*Subtotal*		*Total*				*Special*								*Subtotal*		*Accruing*		*Non-accrual*		*Subtotal*		*Total*
(in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Commercial*		*Loans*		*Loans*		*Other*		*Loans*		*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Commercial*		*Loans*		*Loans*		*Other*		*Loans*
Residential real estate	$	37,945	$	570	$	81	$	0	$	0	$	38,596	$	159,166	$	757	$	159,923	$	198,519	$	37,988	$	478	$	80	$	0	$	0	$	38,546	$	171,353	$	594	$	171,947	$	210,493
Commercial real estate		269,119		4,712		12,744		0		0		286,575		0		0		0		286,575		307,506		4,043		12,690		0		0		324,239		0		0		0		324,239
Construction, land acquisition and development		51,097		0		0		0		0		51,097		5,760		0		5,760		56,857		48,889		0		0		0		0		48,889		4,770		0		4,770		53,659
Commercial and industrial		259,679		831		1,078		0		0		261,588		2,679		0		2,679		264,267		243,948		245		1,588		0		0		245,781		2,447		0		2,447		248,228
Consumer		0		0		0		0		0		0		82,127		394		82,521		82,521		0		0		0		0		0		0		81,181		278		81,459		81,459
State and political subdivisions		46,883		0		0		0		0		46,883		8		0		8		46,891		61,767		0		0		0		0		61,767		7		0		7		61,774
Total	$	664,723	$	6,113	$	13,903	$	0	$	0	$	684,739	$	249,740	$	1,151	$	250,891	$	935,630	$	700,098	$	4,766	$	14,358	$	0	$	0	$	719,222	$	259,758	$	872	$	260,630	$	979,852

	*March 31, 2021*										June 30, 2021
	*Delinquency Status*										Delinquency Status
	*0-29 Days*		*30-59 Days*		*60-89 Days*		*>/= 90 Days*				0-29 Days		30-59 Days		60-89 Days		>/= 90 Days
(in thousands)	*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Total*		Past Due		Past Due		Past Due		Past Due		Total
Performing (accruing) loans:
Residential real estate	$	197,260	$	421	$	0	$	0	$	197,681	$	209,777	$	10	$	31	$	0	$	209,818
Commercial real estate		283,516		166		0		0		283,682		321,333		0		0		0		321,333
Construction, land acquisition and development		56,857		0		0		0		56,857		53,659		0		0		0		53,659
Commercial and industrial		263,520		29		1		0		263,550		247,488		41		3		0		247,532
Consumer		81,032		814		281		0		82,127		80,354		763		64		0		81,181
State and political subdivisions		46,891		0		0		0		46,891		61,774		0		0		0		61,774
Total performing (accruing) loans		929,076		1,430		282		0		930,788		974,385		814		98		0		975,297

Non-accrual loans:
Residential real estate		214		253		0		371		838		174		176		0		325		675
Commercial real estate		1,421		0		0		1,472		2,893		1,352		0		0		1,554		2,906
Construction, land acquisition and development		0		0		0		0		0		0		0		0		0		0
Commercial and industrial		559		34		0		124		717		538		0		0		158		696
Consumer		199		42		75		78		394		166		55		52		5		278
State and political subdivisions		0		0		0		0		0		0		0		0		0		0
Total non-accrual loans		2,393		329		75		2,045		4,842		2,230		231		52		2,042		4,555

Total loans receivable	$	931,469	$	1,759	$	357	$	2,045	$	935,630	$	976,615	$	1,045	$	150	$	2,042	$	979,852

	December 31, 2020
	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:
Residential real estate	$	194,820	$	251	$	159	$	0	$	195,230
Commercial real estate		270,059		606		0		0		270,665
Construction, land acquisition and development		59,785		0		0		0		59,785
Commercial and industrial		237,262		419		16		0		237,697
Consumer		83,486		1,485		403		0		85,374
State and political subdivisions		49,009		0		0		0		49,009
Total performing (accruing) loans		894,421		2,761		578		0		897,760

Non-accrual loans:
Residential real estate		642		39		0		417		1,098
Commercial real estate		1,484		0		0		1,754		3,238
Construction, land acquisition and development		0		0		0		0		0
Commercial and industrial		614		0		124		0		738
Consumer		114		132		96		165		507
State and political subdivisions		0		0		0		0		0
Total non-accrual loans		2,854		171		220		2,336		5,581

Total loans receivable	$	897,275	$	2,932	$	798	$	2,336	$	903,341

	*March 31, 2021*						*June 30, 2021*
			*Unpaid*						*Unpaid*
	*Recorded*		*Principal*		*Related*		*Recorded*		*Principal*		*Related*
(in thousands)	*Investment*		*Balance*		*Allowance*		*Investment*		*Balance*		*Allowance*
With no allowance recorded:
Residential real estate	$	517	$	587	$	-	$	631	$	695	$	-
Commercial real estate		2,383		5,004		-		2,472		5,129		-
Construction, land acquisition and development		67		67		-		0		0		-
Commercial and industrial		91		91		-		398		424		-
Consumer		0		0		-		0		0		-
State and political subdivisions		0		0		-		0		0		-
Total impaired loans with no related allowance recorded		3,058		5,749		-		3,501		6,248		-

With a related allowance recorded:
Residential real estate		1,566		1,566		29		1,357		1,357		11
Commercial real estate		5,682		5,682		47		5,529		5,529		67
Construction, land acquisition and development		0		0		0		66		66		0
Commercial and industrial		748		988		397		391		609		172
Consumer		0		0		0		0		0		0
State and political subdivisions		0		0		0		0		0		0
Total impaired loans with a related allowance recorded		7,996		8,236		473		7,343		7,561		250

Total impaired loans:
Residential real estate		2,083		2,153		29		1,988		2,052		11
Commercial real estate		8,065		10,686		47		8,001		10,658		67
Construction, land acquisition and development		67		67		0		66		66		0
Commercial and industrial		839		1,079		397		789		1,033		172
Consumer		0		0		0		0		0		0
State and political subdivisions		0		0		0		0		0		0
Total impaired loans	$	11,054	$	13,985	$	473	$	10,844	$	13,809	$	250

	*For the Three Months Ended March 31,*											*For the Three Months Ended June 30,*												*For the Six Months Ended June 30,*
	*2021*						*2020*					*2021*						*2020*						*2021*						*2020*
(dollars in thousands)	*Amount*					%	*Amount*				%	*Amount*			%			*Amount*			%			*Amount*			%			*Amount*			%
Provision at statutory tax rates	$	1,431			21.00	%	$	528		21.00	%	$	1,336			21.00	%	$	1,013			21.00	%	$	2,767			21.00	%	$	1,541			21.00	%
Add (deduct):
Tax effects of tax free interest income		(183	)		(2.68	)%		(106	)	(4.22	)%		(181	)		(2.85	)%		(165	)		(3.42	)%		(364	)		(2.76	)%		(271	)		(3.69	)%
Non-deductible interest expense		11			0.17	%		5		0.19	%		12			0.19	%		4			0.09	%		23			0.17	%		9			0.12	%
Bank-owned life insurance		(114	)		(1.68	)%		(27	)	(1.07	)%		(31	)		(0.49	)%		(25	)		(0.52	)%		(145	)		(1.10	)%		(52	)		(0.71	)%
Gains on equity securities		(76	)		(1.12	)%		(3	)	(0.12	)%		(8	)		(0.12	)%		0			0			(84	)		(0.64	)%		0			0
Other items, net		(88	)	��	(1.29	)%		55		2.19	%		3			0.05	%		(22	)		(0.47	)%		(85	)		(0.64	)%		30			0.41	%
Income tax provision	$	981			14.40	%	$	452		17.97	%	$	1,131			17.78	%	$	805			16.68	%	$	2,112			16.03	%	$	1,257			17.13	%

	*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*			*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*			*Amount*			*Ratio*			*Ratio*			*Ratio*			*Ratio*
March 31, 2021
June 30, 2021

Total capital (to risk-weighted assets)	$	155,242		16.26	%		8.00	%		10.50	%		10.00	%	$	161,396			15.79	%		8.00	%		10.50	%		10.00	%

Tier I capital (to risk-weighted assets)		143,299		15.01	%		6.00	%		8.50	%		8.00	%		148,626	��		14.54	%		6.00	%		8.50	%		8.00	%

Tier I common equity (to risk-weighted assets)		143,299		15.01	%		4.50	%		7.00	%		6.50	%		148,626			14.54	%		4.50	%		7.00	%		6.50	%

Tier I capital (to average assets)		143,299		9.88	%		4.00	%		4.00	%		5.00	%		148,626			9.90	%		4.00	%		4.00	%		5.00	%

Total risk-weighted assets		954,662														1,022,134

Total average assets		1,450,133														1,501,242

	*Fair Value Measurements at March 31, 2021*								*Fair Value Measurements at June 30, 2021*
					*Significant*		*Significant*							*Significant*		*Significant*
			*Quoted Prices*		*Other*		*Other*				*Quoted Prices*			*Other*		*Other*
			*in Active Markets*		*Observable*		*Unobservable*				*in Active Markets*			*Observable*		*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)*
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities	$	1,916	$	0	$	1,916	$	0	$	5,124	$	0		$	5,124	$	0
Obligations of state and political subdivisions		205,628		0		205,628		0		215,389		0			215,389		0
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		106,430		0		106,430		0		107,000		0			107,000		0
Collateralized mortgage obligations - commercial		3,803		0		3,803		0		3,821		0			3,821		0
Mortgage-backed securities		16,367		0		16,367		0		19,976		0			19,976		0
Private collateralized mortgage obligations		37,512		0		37,512		0		41,247		0			41,247		0
Corporate debt securities		26,272		0		11,938		14,334		29,688		0			13,079		16,609
Asset-backed securities		9,468		0		9,468		0		10,562		0			10,562		0
Subtotal available-for-sale debt securities		407,396		0		393,062		14,334		432,807		0			416,198		16,609
Equity securities, at fair value		4,267		4,267		0		0		4,303		4,303			0		0
Derivative assets		262		0		262		0		163		0			163		0
Total	$	411,925	$	4,267	$	393,324	$	14,334	$	437,273	$	4,303		$	416,361	$	16,609
													��
Financial liabilities:
Derivative liabilities	$	175	$	0	$	175	$	0	$	91	$	0		$	91	$	0
Total	$	175	$	0	$	175	$	0	$	91	$	0		$	91	$	0

	*Fair Value Measurements at December 31, 2020*
					*Significant*		*Significant*
			*Quoted Prices*		*Other*		*Other*
			*in Active Markets*		*Observable*		*Unobservable*
			*for Identical Assets*		*Inputs*		*Inputs*
(in thousands)	*Fair Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Financial assets:
Available-for-sale debt securities:
Obligations of state and political subdivisions	$	205,828	$	0	$	205,828	$	0
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		56,972		0		56,972		0
Collateralized mortgage obligations - commercial		3,904		0		3,904		0
Mortgage-backed securities		13,026		0		13,026		0
Private collateralized mortgage obligations		38,199		0		38,199		0
Corporate debt securities		24,580		0		8,156		16,424
Asset-backed securities		7,526		0		7,526		0
Subtotal available-for-sale debt securities		350,035		0		333,612		16,424
Equity securities, at fair value		3,026		3,026		0		0
Derivative assets		23		0		23		0
Total	$	353,084	$	3,026	$	333,635	$	16,424

Financial liabilities:
Derivative liabilities	$	143	$	0	$	143	$	0
Total	$	143	$	0	$	143	$	0

*Fair Value Measurements*	*Fair Value Measurements*							*Fair Value Measurements*
*Using Significant Unobservable Inputs (Level 3)*	*Using Significant Unobservable Inputs (Level 3)*							*Using Significant Unobservable Inputs (Level 3)*
		*Corporate Debt Securities*							*Corporate Debt Securities*
		*For the Three Months Ended March 31,*							*For the Six Months Ended June 30,*
(in thousands)		*2021*			*2020*				*2021*			*2020*
Balance at January 1,		$	16,424		$	5,150			$	16,424		$	5,150
Additions			1,750			3,000				4,000			8,800
Redemptions			0			0				0			0
Transfer to Level 2			(3,947	)		0				(3,947	)		0
Sales			0			0				0			0
Total gains or losses (realized/unrealized):
Included in earnings			0			0				0			0
Included in other comprehensive income			107			(470	)			132			(2,237	)
Balance at March 31,		$	14,334		$	7,680
Balance at June 30,									$	16,609		$	11,713

	*March 31, 2021*											*June 30, 2021*
	*Fair Value Measurement*						*Quantitative Information*					*Fair Value Measurement*							*Quantitative Information*
	*Recorded*		*Valuation*		*Fair*		*Valuation*	*Unobservable*	*Value/*			*Recorded*		*Valuation*			*Fair*		*Valuation*	*Unobservable*	*Value/*
(in thousands)	*Investment*		*Allowance*		*Value*		*Technique*	*Inputs*	*Range*			*Investment*		*Allowance*			*Value*		*Technique*	*Inputs*	*Range*
Impaired loans - collateral dependent	$	4,664	$	444	$	4,220	Appraisal of collateral	Selling cost		10.0	%	$	4,677	$	221		$	4,456	Appraisal of collateral	Selling cost		10.0	%
Impaired loans - other		6,390		29		6,361	Discounted cash flows	Discount rate		3.00% - 8.75%			6,167		29			6,138	Discounted cash flows	Discount rate		3.00% - 8.75%
Other real estate owned		58		0		58	Appraisal of collateral	Selling cost		10.0	%		196		(40	)		236	Appraisal of collateral	Selling cost		10.0	%

	*For the Three Months Ended March 31, 2021*				*For the Three Months Ended June 30, 2021*			*For the Six Months Ended June 30, 2021*
(in thousands)	*Amount Reclassified from Accumulated Other Comprehensive Income*			*Affected Line Item in the Consolidated Statements of Income*	*Amount Reclassified from Accumulated Other Comprehensive Income*		*Affected Line Item in the Consolidated Statements of Income*	*Amount Reclassified from Accumulated Other Comprehensive Income*			*Affected Line Item in the Consolidated Statements of Income*
Available-for-sale debt securities:
Reclassification adjustment for net gains reclassified into net income	$	(213	)	Net gain on the sale of available-for-sale debt securities	$	0	Net gain on the sale of available-for-sale debt securities	$	(213	)	Net gain on the sale of available-for-sale debt securities
Taxes		45		Income taxes		0	Income taxes		45		Income taxes
Net of tax amount	$	(168	)		$	0		$	(168	)

	Three Months Ended																		Three Months Ended
	March 31, 2021									March 31, 2020									June 30, 2021									June 30, 2020
	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)	$	873,544		$	9,401			4.30	%	$	780,855		$	8,693			4.45	%	$	909,833		$	9,897			4.35	%	$	875,119		$	8,661			3.96	%
Loans-tax free (4)		46,897			487			4.15	%		52,615			565			4.30	%		44,583			437			3.92	%		46,836			505			4.31	%
Total loans (1)(2)		920,441			9,888			4.30	%		833,470			9,258			4.44	%		954,416			10,334			4.33	%		921,955			9,166			3.98	%
Securities-taxable		286,128			1,968			2.75	%		236,697			1,927			2.92	%		326,848			2,039			2.50	%		247,939			1,739			2.81	%
Securities-tax free		75,876			615			3.24	%		7,698			72			3.74	%		82,304			653			3.17	%		56,220			491			3.49	%
Total securities (1)(5)		362,004			2,583			2.85	%		271,395			1,999			2.95	%		409,152			2,692			2.63	%		304,159			2,230			2.93	%
Interest-bearing deposits in other banks and federal funds sold (8)		13,490			3			0.09	%		7,230			21			1.16	%		7,042			1			0.06	%		6,439			3			0.19	%
Total earning assets (8)		1,295,935			12,474			3.85	%		1,112,095			11,278			4.06	%		1,370,610			13,027			3.80	%		1,232,553			11,399			3.70	%
Non-earning assets (8)		187,490									100,520									158,239									118,722
Allowance for loan and lease losses		(12,189	)								(8,967	)								(12,378	)								(10,114	)
Total assets	$	1,471,236								$	1,203,648								$	1,516,471								$	1,341,161

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits	$	695,794			380			0.22	%	$	528,802			930			0.70	%	$	712,760			327			0.18	%	$	563,491			728			0.52	%
Savings deposits		114,349			20			0.07	%		93,989			28			0.12	%		123,261			22			0.07	%		99,434			23			0.09	%
Time deposits		188,942			398			0.84	%		198,425			702			1.42	%		183,591			369			0.80	%		187,600			625			1.33	%
Total interest-bearing deposits		999,085			798			0.32	%		821,216			1,660			0.81	%		1,019,612			718			0.28	%		850,525			1,376			0.65	%
Borrowed funds and other interest-bearing liabilities		10,310			48			1.86	%		61,843			307			1.99	%		10,310			48			1.86	%		81,813			234			1.14	%
Total interest-bearing liabilities		1,009,395			846			0.34	%		883,059			1,967			0.89	%		1,029,922			766			0.30	%		932,338			1,610			0.69	%
Demand deposits		294,525									172,132									317,670									258,609
Other liabilities		12,413									11,636									11,998									11,065
Shareholders' equity		154,903									136,821									156,881									139,149
Total liabilities and shareholder's equity	$	1,471,236								$	1,203,648								$	1,516,471								$	1,341,161

Net interest income/interest rate spread (6) (8)					11,628			3.51	%					9,311			3.17	%					12,261			3.50	%					9,789			3.01	%
Tax equivalent adjustment					(231	)								(134	)								(229	)								(209	)
Net interest income as reported				$	11,397								$	9,177								$	12,032								$	9,580

Net interest margin (7) (8)								3.59	%								3.35	%								3.58	%								3.18	%

	(1)	Interest income is presented on a tax equivalent basis using a 21% rate.
	(2)	Loans are stated net of unearned income.
	(3)	Non-accrual loans are included in loans within earning assets.
	(4)	Loan fees included in interest income are not significant.
	(5)	The yields for securities that are classified as available for sale 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 liabilities and is presented on a tax equivalent basis.
	(7)	Net interest income as a percentage of total average interest earning assets.
	(8)	Reflects revisions to average balances for the three months ended ~~March 31,~~June 30, 2020 to reclassify certain average deposits in other banks from non-interest deposits in other banks to non-earning assets in the amount of ~~$1,166.~~$21,419.

	Six Months Ended
	June 30, 2021									June 30, 2020
	Average						Yield/			Average						Yield/
(dollars in thousands)	Balance			Interest			Cost			Balance			Interest			Cost
Assets
Earning assets (2)(3)
Loans-taxable (4)	$	891,789		$	19,298			4.33	%	$	827,987		$	17,354			4.19	%
Loans-tax free (4)		45,733			924			4.04	%		49,726			1,070			4.30	%
Total loans (1)(2)		937,522			20,222			4.31	%		877,713			18,424			4.20	%
Securities-taxable		306,601			4,007			2.61	%		255,817			3,666			2.87	%
Securities-tax free		79,108			1,268			3.21	%		31,959			563			3.52	%
Total securities (1)(5)		385,709			5,275			2.74	%		287,776			4,229			2.94	%
Interest-bearing deposits in other banks and federal funds sold (8)		28,904			4			0.03	%		6,835			24			0.70	%
Total earning assets (8)		1,352,135			25,501			3.77	%		1,172,324			22,677			3.83	%
Non-earning assets (8)		154,128									109,620
Allowance for loan and lease losses		(12,284	)								(9,540	)
Total assets	$	1,493,979								$	1,272,404

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits	$	704,324			707			0.20	%	$	546,146			1,658			0.61	%
Savings deposits		118,830			42			0.07	%		96,712			51			0.11	%
Time deposits		186,252			767			0.82	%		193,013			1,327			1.38	%
Total interest-bearing deposits		1,009,406			1,516			0.30	%		835,871			3,036			0.73	%
Borrowed funds and other interest-bearing liabilities		10,310			96			1.86	%		71,828			541			1.51	%
Total interest-bearing liabilities		1,019,716			1,612			0.32	%		907,699			3,577			0.79	%
Demand deposits		306,161									215,371
Other liabilities		12,205									11,350
Shareholders' equity		155,897									137,984
Total liabilities and shareholder's equity	$	1,493,979								$	1,272,404

Net interest income/interest rate spread (6) (8)					23,889			3.45	%					19,100			3.04	%
Tax equivalent adjustment					(460	)								(343	)
Net interest income as reported				$	23,429								$	18,757

Net interest margin (7) (8)								3.53	%								3.23	%

	Three Months Ended March 31,									Three Months Ended June 30,									Six Months Ended June 30,
	2021 vs. 2020									2021 vs. 2020									2021 vs. 2020
	Increase (Decrease)									Increase (Decrease)									Increase (Decrease)
	Due to			Due to			Total			Due to			Due to			Total			Due to			Due to			Total
(in thousands)	Volume			Rate			Change			Volume			Rate			Change			Volume			Rate			Change
Interest income:
Loans - taxable	$	1,005		$	(297	)	$	708		$	353		$	883		$	1,236		$	1,368		$	576		$	1,944
Loans - tax free		(60	)		(18	)		(78	)		(24	)		(45	)		(69	)		(83	)		(63	)		(146	)
Total loans		945			(315	)		630			329			838			1,167			1,285			513			1,798
Securities - taxable		170			(129	)		41			508			(208	)		300			683			(342	)		341
Securities - tax free		721			(178	)		543			210			(48	)		162			760			(55	)		705
Total securities		891			(307	)		584			718			(256	)		462			1,443			(397	)		1,046
Interest-bearing deposits in other banks and federal funds sold		10			(28	)		(18	)		-			(2	)		(2	)		20			(40	)		(20	)
Total interest income		1,846			(650	)		1,196			1,047			580			1,627			2,748			76			2,824

Interest expense:
Interest-bearing demand deposits		357			(907	)		(550	)		157			(558	)		(401	)		383			(1,334	)		(951	)
Savings deposits		5			(13	)		(8	)		5			(6	)		(1	)		10			(19	)		(9	)
Time deposits		(32	)		(272	)		(304	)		(13	)		(243	)		(256	)		(45	)		(515	)		(560	)
Total interest-bearing deposits		330			(1,192	)		(862	)		149			(807	)		(658	)		348			(1,868	)		(1,520	)
Borrowed funds and other interest-bearing liabilities		(241	)		(18	)		(259	)		(279	)		93			(186	)		(549	)		104			(445	)
Total interest expense		89			(1,210	)		(1,121	)		(130	)		(714	)		(844	)		(201	)		(1,764	)		(1,965	)
Net interest income	$	1,757		$	560		$	2,317		$	1,177		$	1,294		$	2,471		$	2,949		$	1,840		$	4,789

	March 31,		December 31,		June 30,		December 31,
(in thousands)	2021		2020		2021		2020
Available-for-sale debt securities:
U.S. Treasury securities	$	1,916	$	-	$	5,124	$	-
Obligations of state and political subdivisions		205,628		205,828		215,389		205,828
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		106,430		56,972		107,000		56,972
Collateralized mortgage obligations - commercial		3,803		3,904		3,821		3,904
Mortgage-backed securities		16,367		13,026		19,976		13,026
Private collateralized mortgage obligations		37,512		38,199		41,247		38,199
Corporate debt securities		26,272		24,580		29,688		24,580
Asset-backed securities		9,468		7,526		10,562		7,526
Total available-for-sale debt securities	$	407,396	$	350,035	$	432,807	$	350,035

	March 31, 2021
(dollars in thousands)	< 1 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. Treasury securities	$	-		$	-		$	1,916		$	-		$	-		$	1,916
Yield								1.23	%								1.23	%
Obligations of state and political subdivisions		4,696			66,570			18,290			116,072			-			205,628
Yield		2.42	%		2.97	%		2.88	%		2.83	%					2.87	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		-			-			-			-			106,430			106,430
Yield														1.83	%		1.83	%
Collateralized mortgage obligations - commercial		-			-			-			-			3,803			3,803
Yield														1.98	%		1.98	%
Mortgage-backed securities		-			-			-			-			16,367			16,367
Yield														2.63	%		2.63	%
Private collateralized mortgage obligations		-			-			-			-			37,512			37,512
Yield														2.49	%		2.49	%
Corporate debt securities		-			1,005			25,267			-			-			26,272
Yield					6.50	%		5.04	%								5.10	%
Asset-backed securities		-			-			-			-			9,468			9,468
Yield														1.47	%		1.47	%
Total available-for-sale debt securities	$	4,696		$	67,575		$	45,473		$	116,072		$	173,580		$	407,396
Weighted average yield		2.42	%		3.02	%		4.01	%		2.83	%		2.03	%		2.65	%

	March 31, 2021					December 31, 2020
(in thousands)	Amount		% of Gross Loans			Amount		% of Gross Loans
1-4 family residential investment properties	$	64,938		6.94	%	$	58,114		6.43	%
Retail space/shopping centers		46,534		4.97	%		43,926		4.86	%

	For the Three Months Ended March 31,						For the Three Months Ended June 30,						For the Six Months Ended June 30,
(dollars in thousands)	2021			2020			2021			2020			2021			2020
Balance at beginning of period	$	11,950		$	8,950		$	12,076		$	9,907		$	11,950		$	8,950
Charge-offs:
Residential real estate		-			-			6			-			6			-
Commercial real estate		-			56			-			-			-			56
Construction, land acquisition and development		-			-			-			-			-			-
Commercial and industrial		19			35			11			92			30			127
Consumer		342			238			119			224			461			462
State and political subdivisions		-			-			-			-			-			-
Total charge-offs		361			329			136			316			497			645
Recoveries of charged-off loans:
Residential real estate		3			2			13			37			16			39
Commercial real estate		46			-			-			1			46			1
Construction, land acquisition and development		-			-			-			-			-			-
Commercial and industrial		25			59			7			425			32			484
Consumer		227			74			170			139			397			213
State and political subdivisions		-			-			-			-			-			-
Total recoveries		301			135			190			602			491			737
Net charge-offs		60			194
Net (recoveries) charge-offs								(54	)		(286	)		6			(92	)
Provision for loan and lease losses		186			1,151			155			831			341			1,982
Balance at end of period	$	12,076		$	9,907		$	12,285		$	11,024		$	12,285		$	11,024

Net charge-offs as a percentage of average loans		0.01	%		0.02	%
Net (recoveries) charge-offs as a percentage of average loans								(0.01	)%		(0.03	)%		-			(0.01	)%

Allowance for loan and lease losses as a percentage of gross loans outstanding at period end		1.30	%		1.19	%
Allowance for loan and lease losses as a percentage of gross loans outstanding at period end, excluding PPP Loans		1.46	%		1.19	%
Allowance for loan and lease losses as a percentage of loans, net								1.26	%		1.16	%		1.26	%		1.16	%
Allowance for loan and lease losses as a percentage of loans, net at period end, excluding PPP Loans								1.37	%		1.32	%		1.37	%		1.32	%

	Rates +200						Rates +400						Rates -100
	Simulation Results			Policy Limit			Simulation Results			Policy Limit			Simulation Results			Policy Limit
Earnings at risk:
Percent change in net interest income		(0.4	)%		(12.5	)%		1.0	%		(20.0	)%		(2.7	)%		(10.0	)%

Economic value at risk:
Percent change in economic value of equity		1.9	%		(20.0	)%		1.3	%		(35.0	)%		(23.6	)%		(10.0	)%

051_partIIitem2

					Total Number		Maximum						Total Number		Maximum
					of Shares		Number of						of Shares		Number of
					Purchased as		Shares that						Purchased as		Shares that
	Total Number		Average Price		Part of Publicly		May Yet be		Total Number				Part of Publicly		May Yet be
	of Shares		Average Price		Announced		Purchased under		of Shares		Average Price		Announced		Purchased under
	Purchased		Paid Per Share		Programs		the Program		Purchased		Paid Per Share		Programs		the Program
Period	(a)		(b)		(c)		(d)		(a)		(b)		(c)		(d)
January 27, 2021 to January 31, 2021		-	$	-		-		975,000		-	$	-		-		975,000
February 1, 2021 to February 28, 2021		8,188		6.96		8,188		966,812		8,188		6.96		8,188		966,812
March 1, 2021 to March 31, 2021		-		-		-		966,812		-		-		-		966,812
April 1, 2021 to April 30, 2021										17,889		6.94		17,889		948,923
May 1, 2021 to May 31, 2021										21,780		7.04		21,780		927,143
June 1, 2021 to June 30, 2021										145,673		7.24		145,673		781,470
Total		8,188	$	6.96		8,188		966,812		193,530	$	7.05		193,530		781,470

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 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 of FNCB Bancorp, Inc. as of March 25, 2020 - filed as Exhibit 3.1 to FNCB's Form 10-Q for the quarter ended March 31, 2020, as filed on May 4, 2020, is hereby incorporated by 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 (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)

Date: ~~May 7,~~August 6, 2021	By:	/s/ Gerard A. Champi
	Gerard A. Champi
	President and Chief Executive Officer



Date: ~~May 7,~~August 6, 2021	By:	/s/ James M. Bone, Jr.
	James M. Bone, Jr., CPA
	Executive Vice President and Chief Financial Officer
	Principal Financial Officer



Date: ~~May 7,~~August 6, 2021	By:	/s/ Stephanie A. Westington
	Stephanie A. Westington, CPA
	Senior Vice President and Controller
	Principal Accounting Officer